Funding for Contractors — Bill Discounting, BG Limits & Working Capital

Financing instruments for contractors

The contractor's financing dilemma

Why contractors struggle with traditional MSME loans

• Don't take a ₹50 L unsecured business loan for working capital — EMI kills cash flow
• Do take bill discounting against RA bills — revenue-matched repayment
• Do take BG limits instead of cash deposits for tender EMD/performance guarantee
• Do take equipment term loan for machinery — asset-backed, longer tenure
• Build a 24-month track record of clean banking + on-time GST filing before approaching

FAQ

Common questions

I have a ₹5 Cr government contract but need ₹1 Cr to mobilise — what's best?+

Three options in order of cost: (1) Mobilisation advance from the client (if your contract allows) — usually interest-free or low-cost; (2) Bill discounting against the first RA bill once you've done some work — cheapest financing; (3) Working capital CC/OD against the contract + your other receivables. Don't take a term loan for mobilisation — the EMI structure doesn't match lumpy contract receipts.

My tender requires a 10% performance BG — do I need to deposit cash?+

No — that's exactly what BG limits are for. The bank issues a performance guarantee on your behalf for a fee (typically 1.5–3% p.a. of the BG amount). Your cash isn't blocked. Most banks give BG limits alongside CC/OD as part of the working capital arrangement.

Government receivables take 6–9 months to pay — does this hurt my loan eligibility?+

It complicates things. Most lenders haircut receivables older than 90 days heavily (50%+) and may not consider those older than 180 days at all. The solution is bill discounting — the lender pays you upfront against the accepted bill, then waits for the government payment themselves (priced into the discount rate). This is far better than waiting 9 months for working capital.