Working Capital Loan Agreement: Key Clauses MSMEs Must Check Before Signing

Please note: this is general educational information, not legal advice. Agreement wording, limits, pricing and conditions vary by lender, facility and borrower profile. Read your own documents in full and consult a qualified professional where needed.

Sanction letter vs facility agreement: two different documents

Borrowers often treat these as the same thing. They are not.

Start with our loan sanction letter checklist, then use this guide at the agreement stage. The most important check is simple: every term in the agreement should match what was sanctioned. Ask about any difference before you sign.

What a working capital agreement typically covers

1. Sanctioned limit and facility type

The agreement names the facility — cash credit (CC), overdraft (OD), working capital demand loan or working capital term loan — and the sanctioned limit. Check any sub-limits (for example, for letters of credit or bank guarantees) and whether the limit is fund-based or non-fund-based. For background on facility types, see the working capital loan guide.

2. Interest rate and how it resets

Look for the benchmark the rate is linked to (such as an external benchmark or MCLR), the spread, how often it resets, and whether interest is charged monthly on the utilised amount. CC and OD interest is usually charged only on what you use, but confirm the method written in your agreement.

3. Fees and charges

Processing, renewal, documentation, inspection, valuation, legal, commitment or non-utilisation charges may apply. Note which are one-time and which recur at every renewal. Compare the total cost, not just the headline rate.

4. Drawing power and margin

For stock- and receivables-backed limits, your usable amount is the drawing power, calculated from eligible inventory and book debts after the lender's margin. Check which stock and debtors count as eligible (for example, whether older receivables are excluded), the margin applied and how often drawing power is updated. Drawing power can be lower than your sanctioned limit.

5. Stock and book-debt statements

Where applicable, the agreement specifies how often you must submit stock and receivables statements, the format, the due date and the consequence of delay. Put these dates in your calendar — late submissions can affect drawing power or attract charges as the agreement specifies.

6. Security and collateral

Primary security is usually a charge (such as hypothecation) over current assets. Collateral may include property, fixed deposits or other assets. Confirm exactly which assets are charged, whether property is mortgaged, and whether security is shared with other facilities. For collateral-free options, see our CGTMSE guide — CGTMSE is a guarantee mechanism, not a guarantee of approval.

7. Personal and corporate guarantees

Promoters, partners or directors may be asked to sign a guarantee. Understand that a guarantor can be personally liable if the business does not repay. Check who must sign and whether the guarantee is continuing.

8. Covenants

Financial covenants may set expectations on ratios or turnover routing. Operational covenants may require prior consent for changes in ownership, new borrowing, dividends or asset sales, and require insurance of charged assets. Ask how compliance is tested and what happens if a covenant is missed.

9. Renewal and review

Working capital limits are generally reviewed periodically. The agreement explains the review cycle, the documents you must provide (financials, stock audit where applicable) and the lender's right to revise, reduce or cancel the limit. Our working capital page covers renewing and enhancing an existing limit.

10. Documentation and conditions

Expect conditions precedent (to be met before first drawal) and conditions subsequent (to be completed within a set time). Keep copies of everything you sign.

11. Events of default

These list what the lender treats as default — non-payment of interest, overdrawing beyond drawing power for a period, covenant breach, misrepresentation, cross-default on other loans, and so on — and the remedies available, which can include recalling the facility and enforcing security. Read this section closely.

12. Penal charges

Under RBI's framework for regulated lenders, penalties for non-compliance are to be levied as penal charges rather than added to the interest rate, and must be disclosed. Check what triggers a penal charge and how it is calculated in your agreement.

13. Account conduct

Lenders watch how the account is run: routing of sales through the account, regular credits, staying within drawing power and timely interest servicing. Good conduct supports smoother renewals and enhancements.

Questions to ask before signing

1. Does every term match the sanction letter? If not, why?
2. How is drawing power calculated, and how often is it updated?
3. What are all the charges, including renewal and inspection?
4. What is the benchmark, spread and reset frequency?
5. Which assets are charged, and who must give a guarantee?
6. What covenants apply, and how are they tested?
7. What counts as default, and what are the penal charges?
8. When is the next review, and what will you need for it?
9. Can I get a complete signed copy of all documents?

Where a working capital term loan fits

If part of your need is converted into a working capital term loan repaid in EMIs, estimate the monthly outgo in the EMI Calculator before you commit. To see what limit your turnover may support, try the eligibility calculator — results are indicative; lenders decide final eligibility.

Frequently asked questions

Talk it through before you sign

MoneyMax Fingrow is a loan advisory firm, not a lender. We can help you understand your sanction terms and prepare for documentation and renewal. Book a consultation or check your eligibility.