1.8 Working-capital lines and term loans

These are the two fundamental product shapes any SME lender ships. Most other products are variations on one of these two.

Working-capital lines

Mechanics

A pre-approved credit limit the borrower can draw against and repay multiple times. The borrower pays interest only on the drawn portion, not on the unutilised limit. Common Indian SME structures:

Sub-product	Shape
Cash credit (CC)	Bank-style limit with quarterly drawing power review, secured against current assets. Heavy paperwork.
Overdraft (OD) / drop-line OD	Limit reduces over 12 – 36 months. Less paperwork than CC.
Revolving line (NBFC)	Pre-approved limit, drawn in tranches, each tranche has a defined tenure (often 30 – 180 days), repays bullet or in instalments, line refreshes on repayment.
Invoice-backed line	Limit usage capped to receivable ageing; each draw maps to one or more invoices.
Anchor-backed line	Limit usage capped to a specific anchor’s purchases; each draw maps to anchor invoices.
PO-backed line	Limit drawn against approved purchase orders, tenure aligned to PO fulfilment.

For an SME WC NBFC, the revolving line with 60 – 180 day drawdowns is the workhorse. It maps cleanly to SME cash-conversion cycles.

Operational complexity

• Limit setup + periodic review — limits reviewed at least annually, often quarterly for new borrowers.
• Drawdown approval — each draw above a threshold needs system approval, sometimes manual approval.
• Schedule generation per draw — every drawdown spawns its own repayment schedule.
• Interest calculation — daily, on actual drawn balance.
• Limit reset — repayment of one draw frees up limit for new draws.
• Drawing power calculation for invoice / PO backed lines — daily refresh based on borrower’s current receivable / inventory position.

LMS data model

This is where most off-the-shelf LMS products struggle. The data model needs:

• Limit master per borrower per product.
• Drawdown master, each with own schedule and own interest accrual.
• Limit-usage view that nets drawdowns against repayments in real time.
• Drawing-power refresh job (daily, batch).

See Section 3.J — LMS for the full LMS module specification.

Pricing

• Interest charged daily on drawn balance at 16% – 24% annualised.
• Processing fee charged per limit setup (annual) at 1% – 2% of limit.
• Drawdown fee charged per draw at 0.25% – 0.5% of drawdown.
• Unused-limit fee rare in SME; can be 0.5% – 1% of unused on quarterly basis if used.

Unit economics

Revolving WC lines are economically attractive because:

• Each ₹1 lakh of limit can turn over 4 – 8 times per year (depending on borrower cash cycle).
• Processing fee annualises aggressively when annualised (1% × 6 turns = 6% of limit per year).
• Repeat customer base reduces marginal acquisition cost.

A ₹30 Cr revolving WC book with 90-day average tenure does ~₹120 Cr of annual disbursement — the platform sees 4× the flow of an equivalent term-loan book.

Term loans

Mechanics

A one-time disbursement, fixed tenure, EMI / structured repayment. No revolving feature.

Common SME term-loan shapes:

Sub-product	Tenure	Use case
Short-term unsecured business loan	6 – 36 months	Working capital cushion, expansion, emergency.
Equipment / asset purchase loan	24 – 60 months	Plant and machinery, vehicles, computers.
LAP — Loan Against Property	36 – 180 months	Larger ticket, longer tenure, secured.
MSME term loan (CGTMSE backed)	24 – 84 months	Government guarantee scheme, lower interest.
Bridge / acquisition	3 – 18 months	M&A, capex bridge.

Operational complexity

Simpler than revolving lines — one disbursement, one schedule, one ledger per loan. Standard LMS handles this trivially.

Pricing

• Interest at 14% – 22% for unsecured SME; lower for secured.
• Processing fee 1% – 2% of sanction.
• Foreclosure / prepayment charges per RBI rules — limited for floating-rate MSME loans.
• Late payment / bounce charges disclosed in KFS, must comply with RBI Penal Charges circular (DOR.MCS.REC.28/01.01.001/2023-24).

Unit economics

Term loans turn over slowly compared to working capital. A ₹30 Cr term-loan book at 24-month average tenure does ~₹15 Cr of annual new disbursement — 1/8 the flow of an equivalent WC book.

Per-loan economics are healthier (longer tenure means more interest income per loan), but capital turn is lower which means fee revenue is lower per ₹ of capital deployed.

Comparison

Dimension	Working-capital line	Term loan
Tenure	30 – 180 days per draw, line evergreen	6 – 84 months
Capital turn	High (4 – 8× per year)	Low (0.5 – 2× per year)
Fee annualisation	High	Low
LMS complexity	High (limits, drawdowns, drawing power)	Low
Borrower stickiness	High (repeat usage)	Low (one-and-done)
Underwriting refresh	Annual / quarterly	At origination
Collection complexity	Variable (per draw)	Stable (EMI)
Best fit	Cash-flow-driven SME WC	Capex, one-off needs

Regulatory risks (common)

• APR disclosure — total cost of credit, including all fees, must be in KFS.
• No automatic limit increase without borrower consent (Digital Lending Guidelines).
• Foreclosure charges — banned for floating-rate term loans to MSME by RBI in 2014.
• Penal charges — separate from interest, reasonable, disclosed.
• Asset classification — applies the same way to both; revolving lines need careful drawing-power monitoring to avoid evergreening.

Technology modules

Both products use the standard module map. The key delta for working-capital lines is the LMS module (J) — see Section 3.J.

Fit for the wedge

The recommended product matrix for an SME WC platform at MVP:

1. Primary product: revolving WC line with 60 – 180 day drawdowns, ₹20 – 50 lakh limits.
2. Secondary product: short-term term loan for borrowers who prefer EMI structure or have a specific capex need.
3. Tertiary product: invoice-backed line for borrowers with strong receivable patterns (year-2).

LAP and longer-tenure loans (24 – 84 months) only at year-3+ when the platform has demonstrated ability to handle longer-duration credit risk and has the capital structure to fund longer-tenure assets.

Sources

• RBI Master Direction – Scale Based Regulation, 2023.
• RBI Penal Charges in Loan Accounts, DOR.MCS.REC.28/01.01.001/2023-24, 18 August 2023.
• RBI Levy of Foreclosure Charges/ Pre-payment Penalty on Floating Rate Term Loans, circular DBOD.Dir.BC.110/13.03.00/2013-14, 7 May 2014 (banned foreclosure charges on floating-rate retail and MSME term loans).
• RBI Guidelines on Digital Lending, 2 September 2022.