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What is the ideal tenor of  a WCTL?


Working Capital means money required to meet day-to-day business need. Examples are money required to maintain inventory, fund credit extended to customers, etc.  It is short term in nature.  A major portion of the working capital is funded by other short term sources like credit from suppliers (sundry creditors) and short term working capital borrowings.


Assuming that a business is making healthy profits, these profits (internal accruals) are adequate to fund  working capital needs, as the business grows.  There will be no need for raising a Working Capital Term Loan (WCTL).


When an enterprise is making losses or when it employs the working capital to fund capital expenditure (CAPEX) or major expansion plans (which is wrong practice and not treated kindly by banks), the organization starts feeling the cash crunch and this will be reflected in the distortion of short term financial parameters like Current Ration less than 1.0, negative net working capital, maximum permissible bank finance (MPBF) less than working capital limits already enjoyed, etc.


In this scenario, the organization will have to strengthen its working capital position with long term funds.  These long term funds may be in the form of fresh equity capital infusion, bonds/ debentures and working capital term loan.


Banks are generally loath to extend WCTL as they consider such scenario a lending risk.  Even when banks are willing to extend WCTL, they generally offer a repayment period of two to three years and not a term of say, six to seven years.  This brings us to the main subject of discussion here.


The CMA Data format requires to classify the repayment obligations maturing next year as current liabilities.  When an organization raises a WCTL with a tenor of two to three years, 50% or 33.33% of the supposedly long term arrangement to shore up working capital, again gets classified as short term, resulting in no significant improvement in current ratio and other parameters.  This means that we are back to square one.


I have faced this paradox in a few situations and Ace had to arrange tailor made, really long term funds with a repayment period of five to seven years, to strengthen the working capital position.


Having faced this painful dilemma, I thought I should share this with others.

Our unique and innovative solution revolving around R2P Principle



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