Working capital · finance guide
How many days is your money gone for?
Every business pays out before it gets paid. The length of that gap, multiplied by how much you sell, is how much working capital you need. Measure it first; then decide how much to shorten and how much to finance.
Stock on handBought day 0, sold day 45
Waiting to be paidInvoice due day 90
Supplier creditSupplier paid day 30
Cash gapYour money, tied up
Stock days 45 + days to be paid 45 − supplier credit 30 =60-day cash cycle
Working capital, in plain terms
Accountants define working capital as current assets minus current liabilities. The useful version for running a business is simpler: it's the cash that sits in stock and unpaid invoices at any moment, less what your suppliers are carrying for you.
A growing business usually needs more of it, not less. Twice the orders means twice the stock and twice the invoices waiting to be paid, so a business can be profitable and still run short of cash. That's the moment most businesses first look for working capital finance.
A quick sizing rule Illustrative
Daily cost of sales × cash cycle in days ≈ cash tied up. If you spend ₹50,000 a day on what you sell and your cycle is 60 days, about ₹30,00,000 is tied up at any time.
Rough rule of thumb with made-up numbers; seasonal businesses need it worked out month by month.
Measuring your own cycle
Three numbers from your accounts make up the cycle. Work them out for the last twelve months, then month by month, because the averages hide the seasons when cash is tightest.
| Measure | Roughly | What shortens it |
|---|---|---|
| Stock days | Average stock ÷ cost of sales × 365 | Buying closer to demand; clearing slow stock |
| Days to be paid | Average receivables ÷ sales × 365 | Invoicing promptly; easier ways to pay; chasing on time |
| Supplier days | Average payables ÷ purchases × 365 | Agreed longer terms (paying late without agreement costs goodwill) |
| Cash cycle | Stock days + days to be paid − supplier days | Any of the above |
A service business with no stock still has a cycle: the days between paying staff and being paid by clients.
Before borrowing: shorten the gap
Finance pays for the gap; it doesn't close it. Ten days off the cycle frees cash permanently and costs no interest, so it's worth looking at the payment side first. Most of it is operational, not financial.
Invoice the day you deliver. Every day an invoice isn't sent is a day added to the cycle.
Make paying easy. A payment link or UPI option on the invoice removes a reason to delay. See payment links.
Know who owes what. Unique references per customer make receipts match themselves. See virtual accounts.
Collect recurring amounts automatically. Mandates for regular customers remove the chasing. See NACH.
Agree supplier terms deliberately. Longer terms, or early-payment discounts where you have spare cash.
Related: payment links, virtual accounts, NACH.
The main kinds of working capital finance
Lenders package working capital in many ways, under many product names. Underneath, most fall into a handful of shapes. What matters is matching the shape to your cycle: a variable, ongoing need suits a limit; a one-off need suits a fixed loan; an invoice-by-invoice gap suits receivables finance.
| Option | How it works | Suits |
|---|---|---|
| Overdraft or cash credit | A limit on your current account; draw and repay freely, interest on what's used | Ongoing, variable needs |
| Short-term working capital loan | A fixed amount for a fixed period, repaid on a schedule | A known one-off need, such as a seasonal stock build |
| Invoice discounting or factoring | A financier advances money against your unpaid invoices | Businesses selling on credit to reliable buyers |
| TReDS | RBI-authorised platforms where MSMEs' invoices on buyers are financed through bidding | MSMEs selling to larger companies, government bodies or PSUs |
| Supplier or dealer finance | A lender pays your supplier (or you pay later) under a programme set up with a large buyer or brand | Businesses in an anchor company's supply chain |
| Digital loans | Short-term loans applied for and serviced online, from a regulated lender, often through an app | Small, fast needs; compare the cost carefully |
Names and terms differ by lender; the same product can be called different things.
TReDS, for MSMEs selling to larger buyers
If you're an MSME and your customers are large companies or government bodies that pay slowly, TReDS is designed for you. It's an electronic platform, authorised by RBI under the Payment and Settlement Systems Act, where your invoices on those buyers are financed by banks, NBFC-factors and other permitted financiers.
Only MSMEs can be sellers. The invoice (a “factoring unit”) is accepted by the buyer, financiers bid, the best bid is chosen, and you are paid early. The buyer then pays the financier on the due date. According to RBI, these transactions are without recourse to the MSME: if the buyer defaults, the financier doesn't come back to you.
- 1UploadThe MSME (or the buyer) puts the invoice on the platform.
- 2AcceptThe other side confirms it.
- 3BidFinanciers bid to discount it.
- 4Paid earlyThe chosen financier pays the MSME.
- 5SettledThe buyer pays the financier on the due date.
Digital loans: what RBI's rules guarantee you
Many small working capital loans are now taken online. RBI's Digital Lending Directions, 2025 apply to banks, NBFCs and other regulated lenders lending digitally, including through apps run by lending service providers (LSPs), which the rules define as the lender's agents. The lender stays responsible for what its LSP does. As a borrower, a few protections are worth knowing.
A Key Fact Statement first
The lender gives you a KFS with the loan's cost, including the APR, before you sign.
A cooling-off period
At least one day to exit by repaying principal and proportionate APR, without penalty.
Money to your own account
Disbursal goes to your bank account, not a third party's, apart from narrow exceptions.
Repayment straight to the lender
You repay into the lender's account directly, with no pass-through or pool account of an LSP.
No fees to the LSP from you
Fees due to the LSP are paid by the lender, not collected from you separately.
No silent limit increases
Your credit limit can't be raised automatically without your explicit request.
Limits on what an app can read
Data is collected with your explicit consent; apps must not access files, contacts or call logs.
Someone to complain to
Nodal grievance officers' details must be shown on the lender's and LSP's websites, in the app and in the KFS.
Summarised from RBI's Digital Lending Directions, 2025 (8 May 2025). This is a summary, not legal advice.
What lenders usually look at
Each lender sets its own criteria, and they change with the product. Most start from the same few questions: how long the business has been going, how much money moves through it, whether it pays what it owes on time, and how much it already owes.
Much of the evidence is already in your records: bank statements, GST returns, audited or management accounts, and your credit history with bureaus. Keeping these tidy, and your business money in business accounts, makes any application faster.
Track record
Years in business, turnover and its trend.
Cash flow
Bank statements showing money in and out, and how regular it is.
Credit history
Repayment record on existing loans and cards, from credit bureaus.
Existing debt
What's already owed, and to whom.
Paperwork
Registration, KYC of owners and directors, tax filings.
What a loan really costs
The advertised rate is only part of it. Processing fees, documentation charges, insurance bundled with the loan and penal charges all add up, which is why the annual percentage rate on the Key Fact Statement is the number to compare. Two loans at the same headline rate can have quite different APRs.
Working capital also costs by the day. On a limit, you pay interest only for the days and amount you actually use; on a fixed loan, you pay for the whole amount for the whole period even if the need was shorter. Match the product to the shape of your need and the cost falls.
Interest on ₹5,00,000 used for 60 days Illustrative
- Amount
- ₹5,00,000
- Rate (hypothetical)
- 18% a year
- Days used
- 60
- Interest ≈ 5,00,000 × 18% × 60 ÷ 365
- ₹14,795
Simple interest on a hypothetical rate, for the arithmetic only. Not an offer or a market rate; fees aren't included.
Seasonal businesses: plan the peak, not the average
For a business that sells most of its year in a few weeks (festivals, weddings, school reopening, harvest), the annual average cycle is misleading. The cash need builds for months before the peak, as stock is bought and paid for, and only falls once the peak's customers have paid.
Work it out month by month: what you'll pay out, what you'll collect, and the running balance. The lowest point on that line is the finance you need, and the month it recovers is when you can repay. Arrange the facility well before the build starts; a lender asked in the peak month has the least time to say yes.
- 1Forecast by monthPayments out and collections in, for the twelve months ahead.
- 2Find the low pointThe deepest negative running balance is the size of the need.
- 3Arrange earlyPut the facility in place before the stock build begins.
- 4Repay from the peakPlan repayment from the collections the peak brings in.
When borrowing isn't the answer
Finance helps a healthy business bridge a timing gap. It doesn't fix a business whose customers aren't paying at all, whose prices don't cover its costs, or whose stock isn't selling. If the cycle keeps getting longer month after month, or each loan is repaid with the next one, the problem is in the business, and borrowing more makes it more expensive to solve. That is the moment to look at pricing, customer terms and slow stock before looking at another lender.
Borrowing well
Match the tenor to the cycle
Money borrowed for 60 days of stock should be repaid from that stock's sales, not rolled over forever.
Don't fund long-term with short-term
Machinery and premises need term finance; short-term money used for them leaves the cycle unfunded.
Know where repayment comes from
Name the collections that will repay the loan before you take it.
Keep headroom
A limit fully drawn every day is no longer a buffer. Leave room for a bad month.
Read the KFS
Fees, APR, penal charges and what happens if you pay late or early.
Borrow from the lender, not the app
Know which regulated entity is lending, and check it on its own website.
Warning signs
Most lenders are what they say they are. The ones that aren't tend to share a few habits, and any one of them is a reason to stop and check the lender before going further.
- won't name the regulated bank or NBFC actually lending
- asks for a fee before the loan is sanctioned
- wants access to your contacts, photos or call logs
- asks you to repay into a personal account or anyone other than the lender
- won't give you a Key Fact Statement
Where Peneu fits
Peneu isn't presented on this page as a lender, and no loan product, rate or lending partner is named. The payment side is where Peneu's products work: collecting faster, matching receipts and seeing settlements clearly, which is how a cash cycle gets shorter. Whether Peneu works with any regulated lenders, and on what basis your data could be shared with one at your request, is confirmed during onboarding.
Working capital questions
What is working capital?
The money a business needs to run day to day: to buy stock, pay staff and suppliers, and wait for customers to pay. On a balance sheet it's current assets minus current liabilities; in practice it's the cash tied up between paying out and being paid.
What is the cash conversion cycle?
The number of days between paying for what you sell and being paid for it. It's usually worked out as days of stock held, plus days customers take to pay, minus days your suppliers give you. The longer it is, the more working capital each rupee of sales needs.
What's the difference between an overdraft and a working capital loan?
An overdraft (or cash credit) is a limit on your account that you draw and repay as needed, paying interest only on what you use. A working capital loan is usually a fixed amount for a fixed period, repaid on a schedule. Which suits you depends on whether your need is ongoing and variable or a one-off.
What is TReDS?
The Trade Receivables Discounting System: RBI-authorised electronic platforms where MSMEs can have invoices due from larger buyers financed by banks and other permitted financiers. Financiers bid, the MSME is paid early, and the buyer pays the financier on the due date. Per RBI, TReDS transactions are without recourse to the MSME.
What is a Key Fact Statement?
A standard summary a regulated lender gives before you sign, showing the loan's amount, tenor, interest, fees and the annual percentage rate (APR) in one place. RBI's Digital Lending Directions require one before a digital loan is signed. Compare loans on the KFS, not on the advertised rate.
Can I cancel a digital loan after taking it?
RBI's Digital Lending Directions give a cooling-off period, set by the lender but not less than one day, during which you can exit by repaying the principal and the proportionate APR without a penalty. The lender may keep a reasonable one-time processing fee if it disclosed that in the KFS.
How do I know a lending app is genuine?
Every digital loan has to come from a regulated entity such as a bank or NBFC, whose name should be clear before you apply. Regulated lenders must list their digital lending apps and the service providers they use on their own websites. Check the lender, not just the app.
Do working capital loans need collateral?
Some do and some don't. Lenders may ask for security such as stock, receivables or property, or lend unsecured against cash flow, usually at a different price. What's asked for depends on the lender, the amount and your business's track record.
Is invoice discounting a loan?
It's finance against a specific invoice: the financier advances money now and is repaid when the invoice is paid. Whether it's treated like a loan for your accounts, and whether the financier can come back to you if the buyer doesn't pay, depends on the arrangement. On TReDS, RBI says it's without recourse to the MSME.
Does Peneu lend money?
Peneu isn't presented here as a lender. Whether Peneu works with any regulated lenders, and whether your payment data could be shared with one at your request and with your consent, is confirmed during onboarding.
Official sources
- RBI — Reserve Bank of India (Digital Lending) Directions, 2025 (8 May 2025)LSP definition, KFS, cooling-off, disbursal and repayment flows, data access, grievance officers, limit increases.
- RBI — Frequently Asked Questions: Trade Receivables Discounting System (TReDS)Participants, process, without-recourse treatment and authorisation under the PSS Act.
Last reviewed . Examples, amounts and screens marked illustrative are not Peneu figures.