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Working capital financing

Working capital financing


WCF represents the most regular type of credit facilities provided to operating entities (“OpCo”), which need to cover the gap in production/sales cycle, when there are purchased needed to be paid on side of liabilities, while these are afterwards turned into trade receivables waiting for incoming payments from Borrowers Off-takers. This gap in Working capital cycle may be also caused by different payment terms with Suppliers (e.g. 30 Days) and Off-takers (60 Days), so that Borrower faces pressure as he should pay to Suppliers before he actually collects any money from his Customers, and therefore needs external financing from Banks to cover this gap in Cash-flow.

The Banks usually require to have certain control over the flows from Off-takers, to see whether they pay on time or not, the pledge of trade receivables accompanied with condition of real payment flows through the Accounts held with the Bank is in this case concluded with Client. This may be then granted to Client as a regulated Borrowing-based facility, whereas the Client is obliged to present to the Bank the overview of trade Receivables, which are eligible for this kind of financing (meaning that they are max. 30 Days overdue and Intercompany items are excluded). Based on this selection, the Bank calculates the Borrowing base limit amount, which will be available to Client for entire month up to the next presentation of Receivables list. This so called WCF facility may be utilized in form of Overdraft or ST-Advances depending on the predictability of future Cash-flow. This facility is provided based on Roll-over nature so that there are no principal repayments, the Borrower has to remit just the interests.

As a security, the Bank usually requires depending on the rating/financial standing of the Borrower following:

  • Own Promissory note
  • Pledge of trade Receivables
  • Pledge of stock inventories

Usual documentation type to be signed with Client:

  • Loan agreement on WCF (utilized in Overdraft or ST-Advances form)
  • Agreement on pledge of trade Receivables resp. Inventories
  • Promissory note agreement (if secured with this collateral)

Further, there may be a stipulation that pledge of Receivables must be confirmed/ acknowledged by Off-takers, so that they are instructed to which Bank Account they should pay to properly respect the condition for Payment traffic (if there are more Banks servicing the same Client). Alternatively, this pledge may be silent, so that no confirmation from Off-takers is needed, which is leaving worst comfort for Bank, but can be acceptable in case when Borrower uses only one Bank (connection), so that all payments are traced through this Account with financing Bank, which is providing the loan. In such case, it is almost guaranteed, that Bank will have a full grip on Borrower Cash-flow.

This WCF is usually supported by additional financial covenants like:

  • Solvency ratio (min. 15% depending on the business industry of Borrower), calculated as Tangible Net Worth / Total Assets or
  • Interest coverage ratio (ICR) to be at least 1.5x which is calculated as the ratio of EBIT/Interest costs.

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