What is Working Capital ?
Working capital is a fund which is essential for cash-flow stability in Nepal's seasonal markets since it represents the money a company utilizes for day-to-day operations, such as handling payroll, paying suppliers, and covering unforeseen expenses.
Working Capital is of two types: Variable or Temporary Working Capital which varies with seasonal requirement and Permanent Working Capital is the minimum level of working that a firm must maintain at all times. In order to reduce cash-flow gaps between business sales cycles—such as low store turnover outside of festival seasons—small and medium-sized businesses frequently require prompt financing.
Many Nepali businesses experience fluctuating revenues due to agricultural cycles and festival-driven retail peaks, leading to periods where expenses outpace income. Without sufficient working capital, firms may delay supplier payments, incur penalties, or miss growth opportunities. So, working capital is the fund to maintain a tradeoff between profitability and cost associated with current assets investment and financing policy.
Concept of Working Capital Loan
A working capital loan is a short-term credit facility designed to finance everyday business operations—helping cover expenses like inventory, salaries, and utilities. In Nepal, these loans are often secured by current assets rather than long-term collateral, making them more accessible to growing businesses. It also helps to maintain regular cash flows, maintain desired scale of operation which contributes to the survival of the firms.
How It Differs from Term Loans & Overdrafts
Unlike term loans, which fund long-term investments and have fixed repayment schedules, working capital loans are revolving and can be drawn as needed up to a set limit. An overdraft lets you withdraw beyond your account balance but resets periodically, whereas a dedicated working capital facility provides a structured credit line based on your business cycle.
Types of Working Capital Loans in Nepal
Banks in Nepal offer different types of working capital loans. Here are some of the most common ones:
1. Overdraft (Cash-Credit) Facilities
Overdrafts (also called Cash-Credit) allow you to withdraw funds up to an approved limit against your current account, paying interest only on the amount used. In Nepal, banks like Nepal Bank provide Cash-Credit limits based on your turnover and collateral, with margins typically of 10–20% on pledged assets.
2. Term Loans (Demand Loans / Short-Term Loans)
Demand loans are perfect for one-time cash flow demands because they are fixed-amount, fixed-tenure loans that you can take out once and pay back on demand or at a predetermined date. Most bank lists Short Term Loan / Demand Loan under its working-capital products, providing lump-sum financing against business cash-flows.
3. Revolving Working-Capital Loans (Lines of Credit)
Revolving loans allow you to match seasonal demands by providing you with a credit line that you can draw from, repay, and redraw during the facility period. It is designed for the commerce and service industries, revolving working capital loans are renewed annually to cover cyclical needs. Businesses may smooth out highs and lows without having to reapply every time thanks to this flexibility.
4. Invoice Financing & Bill Discounting
With invoice financing, a lender advances a percentage (often ~80%) of your outstanding receivables, freeing up cash before customers pay. Banks offers “Bill Discounting” under its funded facilities, discounting your invoices at a fee so you get immediate liquidity. This is especially useful in B2B supply chains with 30–90-day payment terms.
5. Trade-Finance Loans: Trust Receipts & Pre/Post Shipment
For exporters, “Trust Receipt (TR) Loans” finance goods released against shipping documents, allowing you to fulfil orders without upfront funds. “Pre-Shipment” and “Post-Shipment” loans cover production and receivables periods respectively, helping you manage export cycles smoothly.
6. Hypothecation & Pledge Loans
Hypothecation loans let you pledge movable assets (inventory, receivables) as security without transferring ownership, with credit limits based on asset valuations. Bank’s “Overdraft/Hypothecation Loan” and “Pledge Loan” products fund operations against pledged inventory items.
7. Letters of Credit & Bank Guarantees (Non-Funded Instruments)
Though not direct loans, Letters of Credit (LCs) and Bank Guarantees underwrite payments or performance, unlocking trade and contract opportunities without immediate cash. Many bank includes LCs and guarantees under its non-funded working-capital instruments.
8. Merchant Cash Advances & Business Credit Cards
Some fintech platforms and banks extend Merchant Cash Advances—upfront funds repaid via a percentage of daily card sales—and business credit cards, giving instant short-term liquidity. These are less common in Nepal but growing with digital payments.
9. Purchase-Order Financing
Purchase-Order (PO) financing funds the cost of goods before you deliver to customers, with lenders paying suppliers directly based on confirmed POs. This helps businesses scale rapidly without tying up working capital.
10. Commercial Paper
Most large, high credit rating firms issue an unsecured, short-term promissory note to raise the funds. Only large, well established and creditworthy companies are able to borrow funds through sale of commercial paper. So, it can also be great source of working capital financing.
Choosing the Right Facility
- Recurring Needs: Opt for Overdrafts or Revolving Loans to match ongoing cycles.
- One-Time Boosts: Use Term/Demand Loans or Invoice Financing for lump-sum requirements.
- Trade-Related: Leverage LCs, TR Loans, and PO Financing for imports/exports.
- Asset-Backed: Hypothecation and Pledge Loans can offer higher limits against collateral.
By matching your cash-flow patterns and collateral availability to these products, Nepalese SMEs can secure timely, cost-effective working-capital support and keep operations running smoothly.
Government & Subsidized Schemes
1. NRB Working-Capital Guidelines: Issued in 2022, NRB’s guidelines cap working-capital loans at a maximum of 20% of a firm’s estimated annual turnover, up from 15% previously. Excess usage can be converted into periodic loans repayable over five installments by 2082 BS.
2. Women Entrepreneurship Development Fund (WEDF): The Ministry of Industry’s WEDF provides collateral-free loans up to NPR 500,000 at 6% interest for women entrepreneurs, aiming to bridge gender gaps in SME finance.
3. Micro-Enterprise Development for Poverty Alleviation (MEDPA): MEDPA, the successor to UNDP’s MEDEP, supports socially excluded groups—over 70% women and 40% Janajati—with grants and concessional loans to foster micro-enterprise growth nationwide.
Key Features of Working Capital Loan
Amount of Loan: Depending on the requirements, you can avail of a variable sum of money depending upon pledged assets.
Collateral requirement: Most working capital loans are secured by current assets—inventory or receivables—rather than fixed property. Banks typically require a margin of 10–20 percent on pledged assets
Repayment Period: Ranges from 30 days and up to short-term (up to 1 year).
Penalties: You need to pay certain amount of money as a penalties/charge as per the rules and regulations of the bank if there is delay in loan payment.
Interest rate: It can be fixed or floating, typically between Base Rate + 0.5% and Base Rate + 2.5%, influenced by your creditworthiness, relationship with the bank, and product type. The base rate is the rate of interest decided by the Central Bank of Nepal and particular bank can add premium on base rate depending upon their policies.
End-Use Restrictions: Allocate funds strictly to working capital needs—inventory, payroll, receivables financing—and avoid diversions to long-term assets or non-operational expenses.
Steps for Processing the Working Capital Loan
Step 1: Visit multiple banks to know about the terms and conditions about the loan and choose the best one according to your comfort and requirement.
Step 2: After choosing the bank, you need to apply for the loan giving all the details and reasoning for the loan application.
Step 3: Submit all the required documentation along with asset valuation report.
(You must submit all the document at once so that you don’t have to visit the bank very often and your loan processing will be completed within 7 working days depending upon the bank rules and regulations.)
Step 4: After all the documentation done from your side and approval from bank, you need to visit the bank for signing the legal document upon the call from the bank and you need to pay the service charge for the loan processing according to the policy of the banks.
Step 5: After signing the document, the documents signed by you is verified from bank side and after verifying all the documents the loan is sanctioned and disbursed to you fully or partially as per decided in the beginning of the application of loan.
Eligibility Criteria for Working Capital Loan Processing in Nepal
i. Any Nepalese citizen having 18 years at the time of loan origination
ii. Business having adequate, stable, steady and regular cash flows to serve installment and interest.
iii. Company (Pvt./Public)/Proprietorship/Partnership (duly registered with the concerned government authority) at least one year old).
iv. Borrower should have a good credit history and a reasonable debt-to-income ratio.
v. You must provide valid and clear reasons for taking the working capital loan to speed up your approval process.
Documents Required for Working Capital Loan:
1. Citizenship and photo of all the persons involved in loan processing
2. Firm registration certificate
3. PAN/VAT certificate
4. Assets documents with valuation report
5. Tax clearance certificates.
6. Financial Statements of last three years (Cash Flow Statement, Balance Sheet, Profit & Loss Account), if applicable.
7. Projected Financials for current and future five years (Cash Flow Statement, Balance Sheet, and Profit & Loss Account).
8. Article of Association (AOA) and Memorandum of Association (MOA) (as required)
9. Partnership Deed (as required)
Common Pitfalls & How to Avoid Them
The following are the common mistakes while applying for working Capital Loans.
- Incomplete documentation leading to repeated follow-ups
- Ignoring fine print on interest re-adjustment clauses
- Overestimating cash-flow capabilities without buffer
- Mixing personal and business funds in the same account
- Failing to plan repayments aligned with revenue cycles
Signs You Might Be Over-Borrowing
Repeatedly maxing-out of limits, declining interest coverage ratios, or reliance on extensions rather than standard repayments are red flags.
Actionable Tips & Next Steps
1. Creating a Simple Cash-Flow Forecast: Map monthly inflows and outflows on a spreadsheet, highlighting peak and lean seasons. Update it quarterly to track variances against projections.
2. Using Loan Proceeds Wisely: Allocate funds strictly to working capital needs—inventory, payroll, receivables financing—and avoid diversions to long-term assets or non-operational expenses.
3. When to Refinance or Top-Up Your Loan: Assess refinancing if market rates drop by 1 percent or more, or top-up if business expansion requires incremental operating capital—coordinate with your banker to update limits seamlessly.
By following these steps and leveraging the right mix of loan products and government support, beginner entrepreneurs in Nepal can secure working capital that fuels growth, smooth cash-flow challenges, and lays the foundation for long-term success. So, these are the basic things and steps you need to know while processing for the working capital loan in Nepal and we hope this helps you throughout the process. And if you have any queries related to working capital loan in Nepal just drop the questions below, we will try to make you clear on everything about it.