Working Capital for Contractors in India: Cash Credit, BG and LC Limits
Working capital for contractors in India is usually a package of limits: cash credit or overdraft for materials and labour, a bank guarantee and LC limit for bids, performance security and purchases, and discounting of certified bills. As of 9 November 2026, RBI's rules let a lender issue guarantees mainly to customers it already funds.
Most contractors in India do not run short of work. They run short of cash between doing the work and getting paid for it. A civil, EPC or interiors contractor buys steel, cement and labour first, raises a running account (RA) bill later, waits for the client to certify it, and then waits again for payment. On top of that, the client usually holds back a retention from every bill and asks for a bank guarantee before the contract even starts.
That is why a contractor's banking needs look different from a trader's or a manufacturer's. A cash credit or overdraft line alone is rarely enough. Most contractors need three things working together: a fund-based limit for day-to-day costs, a non-fund-based limit for bank guarantees and letters of credit, and a way to turn approved bills into cash early.
This guide explains each one, how lenders size them, what RBI's rules say as of 9 November 2026, and what it costs, with worked examples. It is general information, not financial, legal or tax advice. Every credit decision sits with the lender.
Working capital for contractors: the three limits you need
Working capital for contractors is usually a package of limits from the same lender, sanctioned together and reviewed each year. Here is how the parts fit.
| Limit | Type | What it pays for | How you draw it | Main cost |
|---|---|---|---|---|
| Cash credit (CC) or overdraft (OD) | Fund-based | Materials, labour, site overheads, mobilisation | Running account, up to drawing power or limit | Interest on the amount used |
| Bank guarantee (BG) limit | Non-fund-based | Bid security, performance security, advance payment and retention release guarantees | Each guarantee issued within the limit | Commission on each guarantee, plus any cash margin |
| Letter of credit (LC) limit | Non-fund-based | Purchases of steel, cement, equipment and other inputs on credit | Each LC opened within the limit | LC commission and charges; interest if a bill is financed |
| Bill discounting | Fund-based | Early cash against certified RA bills or approved supplier bills | Per bill, against the client's approval | Discount charge for the days funded |
RBI's own definitions help here. Under its Credit Risk Management Directions, 2025 (updated as on 1 October 2026), cash credit is a running account against hypothecation of goods and book debts, with drawing power fixed periodically from the value of eligible current assets. The same Directions define a bank guarantee as a financial or performance guarantee issued on a client's behalf: a performance guarantee assures compensation if a contract is performed late or inadequately.
How lenders size a contractor's fund-based limit
Lenders start from your operating cycle: how many days pass between spending money on a site and getting it back. For a contractor, the long parts are work in progress that is not yet billed, bills awaiting certification, and certified bills awaiting payment. Creditors who give you credit shorten the gap. Our guide to the working capital cycle formula shows the calculation step by step.
Lenders also look at your order book, the client mix (government, PSU, private developer), the billing history on past contracts, and how long certified bills actually take to be paid. A contractor whose bills are paid in 30 days needs a much smaller limit than one with the same turnover whose bills take 120 days.
Worked example 1: sizing the cash credit limit
Illustrative example, assuming annual billing of ₹60 crore, unbilled work plus unpaid bills equal to 90 days of billing, materials at 60% of billing bought on 30 days' credit, and a 25% margin from the contractor's own funds:
| Item (illustrative) | Amount |
|---|---|
| Unbilled work plus unpaid bills (₹60 crore x 90 ÷ 365) | ₹14,79,45,205 |
| Less: supplier credit (₹60 crore x 60% x 30 ÷ 365) | ₹2,95,89,041 |
| Net working capital gap | ₹11,83,56,164 |
| Contractor's own margin (25%) | ₹2,95,89,041 |
| Indicative fund-based limit (75%) | ₹8,87,67,123 |
Every number above is an assumption. Your lender will use its own method, your audited and projected financials, and your stock and book debt statements. Our guide on how banks calculate a working capital limit explains the common methods.
Bank guarantees: what contractors need and what RBI requires
A contractor typically needs several guarantees over one contract's life:
- Bid security when tendering, unless the tender accepts a bid securing declaration instead.
- Performance security on award, held until the work and the defect liability period are complete.
- Advance payment guarantee if the client pays a mobilisation or material advance.
- Retention release guarantee where the client agrees to release retention money against a guarantee.
For central government works, the amount is set by procurement rules. A Department of Expenditure office memorandum of 29 December 2023 keeps performance security plus security deposit or retention money for works contracts at 3% to 10% of contract value. The same memorandum allows performance security to be given as an insurance surety bond, demand draft, fixed deposit receipt, bank guarantee or e-bank guarantee from a commercial bank, or acceptable online payment. State governments, PSUs and private developers set their own terms, so check each tender.
What RBI's rules mean for your guarantee limit
RBI's Non-Fund Based Credit Facilities Directions, 2025, issued on 6 August 2025 and in force from 1 April 2026, set the ground rules that lenders now follow for guarantees, LCs and co-acceptances:
- Your BG usually comes from the lender that funds you. A lender may issue a guarantee or LC only for a customer that has a funded credit facility with it. The exceptions include an obligor with no fund-based facility from any regulated lender in India, a no-objection certificate from the lenders that fund you, and a guarantee fully secured by eligible financial collateral such as a deposit.
- Guarantees are irrevocable and unconditional. The guarantee must have no clause letting the lender cancel it unilaterally, and must carry a clear mechanism for paying without demur when invoked.
- An invocation is paid. The lender must honour the guarantee when it is invoked as per the guarantee deed, unless a court order restrains it.
- An invoked guarantee becomes your loan. Once a non-fund-based facility devolves, it is converted into a fund-based facility and treated like any other loan.
- Lenders cap unsecured guarantees. Each lender must set internal ceilings for guarantees in general and unsecured guarantees in particular. That is why many lenders ask for a cash margin or collateral against a BG limit.
- E-guarantees are recognised. A lender issuing electronic guarantees must have a standard operating procedure for them.
Point 1 matters most when you change lenders. If your cash credit sits with one lender and a second lender offers cheaper guarantees, the second lender will usually need a no-objection certificate from the first, or full cover by a deposit.
Worked example 2: what guarantees and retention tie up
Illustrative example, assuming a ₹40 crore works contract with performance security of 5%, retention of 5% of each bill, a BG commission of 1.5% a year, and a 15% cash margin on the guarantee held as a fixed deposit:
| Item (illustrative) | Amount |
|---|---|
| Performance bank guarantee (5% of ₹40 crore) | ₹2,00,00,000 |
| BG commission for one year (1.5%) | ₹3,00,000 |
| BG commission for two years | ₹6,00,000 |
| Cash margin locked in a fixed deposit (15% of the BG) | ₹30,00,000 |
| Retention held by the client once the full contract is billed (5%) | ₹2,00,00,000 |
| Guarantee plus retention, as a share of contract value | 10% |
The point is that a contractor's own cash gets tied up even before the first bill is paid. Plan your BG limit, cash margin and retention release dates as carefully as your CC limit. Commission and margin are set by each lender.
Letters of credit for material purchases
An inland letter of credit lets you buy steel, cement or equipment on credit while the supplier gets the comfort of a lender's undertaking. A usance LC gives you a fixed credit period. On the due date, you pay the lender, usually from your cash credit account or from collections.
LCs help when a large supplier will not give open credit to a mid-sized contractor. They also stretch your supplier credit, which shortens the working capital gap in Worked example 1. The catch is discipline: if collections are late on the LC due date, the LC is paid from your CC limit and your drawing power takes the hit.
If your lender co-accepts bills instead, RBI's rules are strict: a lender may co-accept only genuine trade bills, and must check that the goods covered have actually been received in the borrower's stock accounts.
Getting paid on time: MSMED Act, TReDS and bill discounting
If you are a micro or small contractor
If your Udyam registration shows you as micro or small, sections 15 and 16 of the MSMED Act, 2006 protect you. The buyer must pay by the date agreed in writing, which cannot be more than 45 days from acceptance, or within 15 days if there is no written agreement. A buyer that pays late owes compound interest with monthly rests at three times the Bank Rate notified by RBI, whatever the contract says.
With RBI's Bank Rate at 5.75% since 7 October 2026, a buyer that pays a micro or small contractor late owes interest at 17.25% a year, compounded monthly, under section 16 of the MSMED Act.
Illustrative example, assuming a ₹1 crore RA bill from a micro contractor, accepted under a written 45-day term and paid late, with interest at 17.25% a year compounded monthly: one month late costs the buyer ₹1,43,750, two months ₹2,89,566 and three months ₹4,37,479.
If your client is a Central Public Sector Enterprise, section 15A of the amended MSMED Act requires it to settle invoices from MSMEs through an RBI-authorised TReDS platform, from 15 October 2026. Our guide to the MSMED Amendment Act 2026 covers what started and what is not yet in force.
Turning approved bills into cash
When your client is a large developer or corporate, a certified RA bill can be discounted. The lender funds a share of the approved bill upfront and is repaid when the client pays. Through MoneyKarma's lending partners, vendor bill discounting carries a minimum 10% margin and a tenor of up to 90 days, for suppliers with 2+ years of association with the developer, sales of ₹50 crore or more to it, and positive PAT and TNW.
Illustrative example, assuming a ₹1.5 crore certified RA bill, a 10% margin so that ₹1.35 crore is funded, 60 days to the client's due date, and a discount rate of 10.5% a year: the discount charge is ₹2,33,014 and the contractor receives ₹1,32,66,986 upfront. Carrying the same ₹1.35 crore for 60 days on a cash credit line at an assumed 12% would cost ₹2,66,301. Actual rates depend on the lender and on the client's and your credit profile.
Our guide to contractor bill discounting explains RA bill approval and lender checks in detail.
When sites stop but limits keep running
Contractors on NCR sites are seeing this now. Under GRAP Stage III, in force since 6 November 2026, dust-generating construction work across Delhi-NCR is restricted, so billing pauses. Interest on the cash credit you have used, commission on live guarantees, and the cash locked in BG margins and retention do not pause. Our guide to the GRAP 3 construction ban and construction finance covers the developer side. If you need temporary headroom, see how to increase a working capital limit or get an ad hoc limit.
How to apply: a checklist for contractors
- Order book schedule. List each contract with client, value, work done, billed, certified, received, retention held and expected completion.
- Bill ageing. Show how long certified bills took to be paid over the last 12 months, by client.
- Guarantee schedule. List every live BG with amount, beneficiary, expiry and claim period, and every BG you expect to need in the next 12 months.
- Financials. Audited financials for 2 to 3 years, current-year provisional figures, and projections that tie to the order book.
- GST and bank statements. Lenders match GST returns with bank credits and billing.
- Udyam certificate, if you are an MSME.
- Collateral and margin plan. Decide upfront what you can offer as security and how much cash margin you can keep for guarantees.
For the full list by loan type, see our checklist of documents required for a business loan.
Common mistakes contractors make
- Asking only for a CC limit. Without a BG limit sized to your order book, you cannot bid or take advances even when cash is available.
- Letting expired guarantees sit. A BG past its expiry can keep using your limit until it is returned or released under the lender's policy on claim periods. Chase the originals and release letters.
- Ignoring retention. Retention is your money held by the client. Track release dates and use retention release guarantees where the client allows.
- Funding long delays with CC. If one client pays in 120 days, discounting its approved bills may be cleaner than stretching your CC limit.
- Changing lenders without planning the BG move. Live guarantees cannot simply be shifted; plan the no-objection certificate and the replacement guarantees before you switch.
How MoneyKarma helps
MoneyKarma is a loan distribution platform for Indian businesses and real estate developers, with 90+ lenders. Not a lender. We help contractors compare cash credit, bank guarantee, LC and bill discounting options from public sector banks, private banks, NBFCs and financial institutions, prepare the order book, bill ageing and guarantee schedules lenders ask for, and coordinate with lenders through sanction and renewal. Every credit decision, including limit size, margin, commission and security, is made by the lender. Our team responds within 24 hours on average, and MoneyKarma has facilitated ₹2,500+ Cr in funding. See working capital or apply here to start.