Annual Renewing of Working Capital Limit becomes a daunting task for many of the MSME owners. They need to prepare & submit lot of documents to Bankers like CMA Data, Provisional Financials, Limit justification note, answer various queries on what all went wrong & why in the recent past, what are their plans for future and how do they intend to achieve them, etc. Adding to this – if there is a requirement to enhance the limit, this makes the job all the more difficult.
BankKeeping comes to the rescue during this period by understanding, preparing, reviewing and submitting all the information needed by the Banker, well in advance – in the best possible manner. The promoter & his team largely focus on their business and BankKeeping takes care of the entire renewal process. Of course, the management needs to be there during meeting with Bankers. The enhancement of limit comes under premium services which is charged at subsidised rate.
The work starts from submitting the required information initially. It then, broadly involves lot of other activities like:
- Preparing & submitting the CMA Data
- Preparing a Snapshot of how was the previous year, present position and plans for future
- Explaining our Present Ask during renewal – with proper reasoning & justification
- Properly replying to all the queries raised by the Credit & Risk Team
- Coordinating & Getting Due Diligence done in the best possible manner.
- Negotiation to Improve the Terms of Sanction (wherever needed)
- Review of Draft Sanction Letter
- Explaining the implications of all the clauses & sub-clauses to Promoter before accepting the Final Sanction Letter
- Ensuring modification to terms (wherever needed)
- Acceptance of the Sanction Letter
- Facilitate in complying with Pre-Disbursement Conditions
- Finally, ensuring receipt of Funds
Working Capital Limits – An Overview
Let’s begin by answering the question, what is working capital limit? Working Capital Limit is the maximum amount that a business can borrow from the banks to meet its day-to-day operational expenses. The interest that the bank can charge for such loans is limited to the amount used and not the amount sanctioned. The nature of business will decide the type of working capital it will require. For example, an exporter may need a packing credit limit whereas a trader will be happy with his OD facility to meet everyday expenses. Based on this understanding let us now have a quick look at the different types of working capital.
Types of Working Capital
As discussed previously, there are several types of working capital depending on the need and nature of a business. Some can be fund-based and others non-fund-based. As the name suggests the fund based capital is when the company gets money from the lender whereas non-fund-based funding is where actual money transfers are not involved. The bank stands as a guarantor or promisor to undertake certain obligations in case the company fails to do so. This has no monetary involvement unless the SME/company defaults. Let us briefly look at some possible types of working capital.
Cash Credit (CC)
To meet the working capital requirements a SME company may avail cash credit. The bank audits the accounts for stocks, debtors, and creditors before sanctioning the CC limit for any SME or company. A collateral may also be required for the same. This type of credit is generally given for a year and needs to be renewed before the year ends so that financial flow is not interrupted for smooth operations of the company.
There are various submissions that need to be made including stock statements, debtors statements showing the ageing of debtors, etc.
Overdraft Facility
This kind of credit is needed to meet day-to-day expenses. The interest is charged on the daily OD balance. It is like a revolving loan where the deposits can be reused as and when required. This OD limit needs to be revalued to increase limits and various documents need to support the request for renewal and revaluation thereof.
Packing Credit
This kind of credit is extended to the exporters but needs various proofs of sale/order to make such credit available to the SME company. The documents required will be:
- An LC in favor of the exporter
- An irrevocable purchase order
- Other evidence supporting the order of export.
Bank Guarantee
This is a form of Non-Fund based credit. It is a guarantee of support and commitment that the bank gives on behalf of the Company that in case of failure by the company to fulfill its obligation, the bank will do so on its behalf. No monetary transactions happen as yet but the company can leverage the goodwill of the bank and proceed with its undertaking. The bank on its part will review the accounts, plans, and projections to be able to guarantee the company for some consideration.
Need for Renewal of Working Capital
To take charge of your finances and to be ahead of the competition and your requirements, it is important that the annual renewal of the working capital happens on time. The bank will assess the company’s credibility and requirements in various ways before the renewal of working capital. The bank will need the next year’s projections, and account statements, and also check the last year’s financial reports in conformity with the previous projections. This in itself is a time-consuming process and if not planned for in advance then the company will be short of working capital funds for the interim tenure. This may result in the need to borrow for ad-hoc limits (at higher interest rates), creating more tasks for the owner or SMEs.
Financial Planning:
While applying for the renewal you have to make projections and draft financial statements for the upcoming year. This helps businesses plan better and be future-ready. Failure to renew bank limits can hinder regular financial flow and hence growth.
Maintain Operational Liquidity:
The markets are volatile and the companies need to be prepared for such fluctuations to maintain operational liquidity during unforeseen circumstances. This can serve as a safety net for the company’s financial well-being and regular operations.
Corrective Measures:
When we apply for the renewal we prepare projections and also submit present financial statements. The companies can compare last year’s projections with the achievements and point out the discrepancies if any. That helps the firms take corrective actions for better future results and analyze various strengths and weaknesses along with threats and opportunities that the environment poses in the respective industry.
Process of Renewal
The renewal process involves making and submitting various documents like applications for Renewing Bank Limits and submitting request letters for working capital enhancement, all the letters have to be drafted in the prescribed Limit Letter Formats of various banks. Renewing CC/OD Limits and drafting letters to banks to increase limit facilities can be a daunting task for the owners and SMEs. This is where we at BankKeeping can hold hands for your financial stability and management.
Documentation
As mentioned above, there is a set of documents that needs to be prepared by the borrowing company before the renewal. These documents need to be submitted to the bank for due diligence and review. The list of such documents is as follows:
- CMA data report
- Income statement
- Projections for future Profit and Loss, Cash flow, etc.
- Balance Sheet
- Business performance metrics
- Internal due diligence
- Audit Reports
- Others that are industry-specific to your business
Application
The application for renewal with strong reasoning needs to be drafted in the prescribed manner and sent to the bank well in advance. That will ensure timely renewal and disbursement of the loan without any hindrances to the regular operations of the business. The letter for renewal should clearly state the new ask, justification for the same, and supporting documents.
Review/Audit by Bank
The work doesn’t end with the application. The company has to ensure that all requisite due diligence is done properly. Any queries raised by the Credit and Risk Team should be answered promptly and accurately. That can happen only when the company is prepared and has diligently worked on its financials and projections. In short, the background and homework should be in place to satisfy the Credit and Risk Team of the bank for Credit Renewal.
Final Negotiations
As a borrower, you have the right to arrange for better terms on your credit and that is possible through effective negotiation. The company or SME needs to review the draft sanction letter. The company or SME needs to completely understand all the clauses/subclauses of the sanction letter including its implications. And ensure any modifications to the terms in the final sanction letter.
All this can be humongous for the SMEs and owners. Do not fret about the jargon and banking terminologies. We at BankKeeping are equipped to handle such financial details and be of help to businesses so that they can be in control of their credit renewal and finances.
Approvals
Once the bank reviews your credit scores, financial projections, and other financial statements, it will renew the credit facility. Before starting to cheer, the SME/company needs to:
- Accept the sanction letter
- Ensure it has all the updated modifications,
- Comply with any pre-disbursement conditions put forth by the lender
- Finally, ensure that the funds are received.
Well, here again, we need to keep monitoring the interest charged by the banks to eliminate any discrepancies on time and adhere to the timelines and deadlines for interest payments or document submissions on a regular basis. This process carries on and keeps getting complex as your business reaches new heights and achieves more growth.
Conclusion:
Renewal of credit is a Strategic Move for Financial Security. But, the Annual Renewing of the Working Capital Limit becomes an intimidating task for many SME owners and even corporations. At BankKeeping we help in understanding the process, preparing the necessary documentation, and evaluating your current terms. So that you can secure the funding needed to support your operations and focus on strengthening your business. We help your business stay proactive in managing your working capital, renewing the credit, and negotiating better terms to ensure that your business continues to thrive.
Not only this we have various software and templates that can help you in making a quick turnaround for the work at hand. All this makes monitoring and controlling your banking journey a piece of cake when you partner with us at BankKeeping.
FAQs
Does Renewal Impact Our Business Directly?
Yes, the timely renewal of working capital has direct consequences on the business operations of SMEs and corporations. It not only helps you manage your cash flow effectively but also helps in better proactive future financial planning. Further, any delay in renewal may result in additional interest/ penal charges. For any further doubts contact us at BankKeeeping.
Is there an Alternative to Renewal from the Same Bank?
If you think the change of bank can positively impact your business cash flow or get you an increased limit you may consider the same. SMEs and corporations can explore banks that offer better credit facilities more suited to their business needs. Opting for non-traditional lenders with more flexible terms can be evaluated. Allow the financial wizards at BankKeeping to make your credit application journey effortless.
What are a Few Common Mistakes During Credit Renewal?
Companies do not follow the timelines and may get stuck in documentation and paperwork at the last moment. This will delay the process of renewal. To prevent such delays all audits and documentation should be completed on time and applications for renewal be made at least one month before our term ends. This will ensure a regular flow of capital to meet a company’s financial flow. Take the help of the specialized services at BankKeeping to avoid any such mistakes.
How can we get better Renewal Terms?
This completely depends on your financial health, credit score, and future growth projections. The company needs to be able to convey all this to the bank clearly and effectively to be able to negotiate better terms for the renewed limit. For that, you need to talk to the bank in their language and an expert like BankKeeping can help you achieve all these goals efficiently while you only stress for business not banks.
Focus on your Business; We’ll take care of your Banking needs
Role Of BankKeeping:
BankKeeping can be your trusted advisor throughout the credit renewal process. Whether you need assistance in drafting the letters, Making the reports, projections, and CMA data, Negotiating the terms for better Credit, or Simply reminding you for timely completion through our dedicated Banking Compliance Calendar. BankKeeping has it all. We can be your guide through the complex journey with your banking partner. Our seasoned financial experts ensure that your Credit Renewal and Enhancement Request letter conveys your financial needs along with documents to showcase your potential profits and growth.
We are a team of experts who are committed to bringing about a positive change in the way that SMEs bank. With our dedicated products like Letter writing templates, Banking Compliance Calendar, CMA reports, ROC charge structure, Attractive Dashboard, etc. We have all the solutions that you require to make your banking experience smooth and timely
By Partnering with BankKeeping you do not have to worry about any banking deadlines, complicated documentation, and endless loop of communications to achieve the desired credit from any lending institution.