Working Capital for Software Industry

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Working Capital for Service Industry

There is a common misconception in India that working capital facility cannot be extended to the service industry or software industry, as the model of business does not involve the holding of inventory or receivables. However, the RBI through various circulars has clearly mentioned that working capital facility can be extended to businesses in the service industry or software industry based on the projected annual revenue. In this article, we look at the regulations for sanction of working capital facilities for service industry.

Working Capital for MSME Businesses

The Reserve Bank of India through Master Circular on Loans and Advances has laid down the guidelines for providing of working capital facilities to MSME businesses. MSME businesses in the service sector are those enterprises having investment in plant and equipment of less than Rs. 5 crores.

For such MSME enterprises, enjoying working capital limits of up to Rupees five crore, working capital finance is to be provided at 20% on the basis of their projected annual turnover. The guidelines have also mentioned that banks should adopt a simplified procedure in respect of all MSME units (new as well as existing) for sanctioning of working capital facilities.

Hence, service businesses and technology businesses having MSME registration can request for sanction of working capital facilities based on the above simplified guidelines.

Working Capital for Information Technology and Software Industry

Based on the recommendations of the “National Task Force on Information Technology and Software development“, the RBI has provided for a guidelines for extending working capital facilities to the information technology and software industry.

Some of the highlights of the guidelines include the following:

  1. Banks can consider sanction of working capital limits based on the track record of the promoters group affiliation, composition of the management team and their work experience as well as the infrastructure.
  2. In the case a business has working capital limits of up to Rs 2 crore, working capital assessment can be made at 20 percent of the projected turnover. In other cases, the banks can consider assessment of MPBF on the basis of the monthly cash budget system. For the businesses in the IT and software industry enjoying working capital limits of Rs 10 crore and above from the banking system, the regular guidelines regarding working capital financing would be applicable.
  3. Banks can stipulate a reasonable amount as promoters’ contribution towards margin.
  4. Banks can obtain collateral security wherever available. First / second charge on current assets, if available, can also be obtained.
  5. The rate of interest for loan to the IT and software industry must be similar to the general category of borrowers. Further, concessional rate of interest can be provided for software exporters as pre-shipment/post-shipment credit.
  6. Banks can evolve tailor-made follow up system for such loans and even obtain quarterly statements of cash flows to monitor the operations. In case the sanction was not made on the basis of the cash budgets, they can devise a reporting system, as they deem fit.

Know more about obtaining loan for startup in India.

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