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Working Capital loan
Working capital loan refers to the part of the working capital limit of a borrower extended to him in the form of a loan. The loan component is intended to cover the permanent part of the working capital need while cash credit component would cater to the fluctuating part of the limit. The key distinction between the loan component of the Working Capital limit and the cash credit component is that interest is charged on the loan component irrespective of utilization when such a term loan is availed. Working capital loan component was introduced in the mid nineties to ensure better credit discipline on the part of the borrowers. However, carving out a loan component is mandatory only in case of medium and large companies (with working capital limits in excess of Rs. 10 crores). Since SMEs do not generally possess expertise in managing loan funds in case of low utilization of limits and also have lower control on their working capital management, carving out a loan component is not mandatory in their case. Back to Types of Working Capital Financing Cash Credit |
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