Cash credit and overdraft are day-to-day business cash loans. Banks set the limit from sales, stock, receivables and your past use of the account — often for tickets of ₹5 crore and above. This page shows the usual checks.
What problem does working capital finance solve?
Every business has an operating cycle: you buy raw material or goods, hold them as inventory, sell on credit, and finally collect cash. Suppliers give you some credit. The gap between cash going out and cash coming in must be funded — by your own money (margin) and by the bank (working capital limit).
In plain words: the operating cycle is how many days pass between paying for stock and getting paid by customers, after you subtract the days your suppliers wait to be paid.
Cash cycle (days): days to sell stock and collect money, minus days you take to pay suppliers. Banks still write it as Inventory days + Receivable days − Payable days.
A distributor in Chennai with 45 days of stock, 60 days of receivables and 30 days of supplier credit has a 75-day cycle. A Tiruppur exporter’s cycle may run from yarn purchase to export realisation. The longer the cycle, the more working capital is needed.
How do banks calculate the limit?
The turnover method
For smaller business limits, many banks use the turnover method (a bank working-capital rule, sometimes called the standard turnover method (Nayak)): working capital need is about 25% of next year’s sales, of which the bank funds about 20% and you bring 5%. Simple and fast — but only as good as the sales plan, which banks test against past audited numbers and GST returns.
The highest loan amount the bank will give
For larger limits, banks build the need from a money-forecast pack (CMA data): planned stock, unpaid bills and other short-term assets, minus short-term amounts you owe others (not counting the bank loan). Under the common Method 2, you must fund 25% of those short-term assets from your own long-term money. The rest is the maximum bank finance.
The cash budget method
For seasonal businesses — agro-processing, sugar, some textiles — banks may use month-by-month cash budgets and sanction different limits for peak and non-peak seasons.
What is drawing power and why is it often lower than the limit?
The sanctioned limit is the ceiling. The drawing power (DP) is what you can actually use at any time, calculated each month from your stock statement:
| Item | Amount |
|---|---|
| Eligible stock (paid, not obsolete) | A |
| Less: stock margin (say 25%) | − |
| Eligible receivables (within age limit, e.g. under 90 days) | B |
| Less: receivables margin (say 25–40%) | − |
| Less: creditors for goods (as per policy) | − |
| Drawing power (how much you can draw this month) | DP |
If DP falls below the limit, you can draw only up to DP. Old debtors, slow stock and growing creditors all cut DP. This is why disciplined stock statements matter as much as the sanction.
What does a bank look for in a working capital proposal?
- Credible projections — turnover growth consistent with history, capacity and the order book.
- Holding levels — inventory and receivable days in line with the industry; sudden increases need explanation.
- Can you pay near-term bills, and how much debt vs worth — current ratio (many banks look for at least about 1.33 under Method 2), and total debts vs owner money.
- Account conduct — utilisation (persistently low utilisation suggests over-assessed limits; persistent overdrawing suggests under-assessment or stress), cheque returns, timely interest servicing.
- Routing of sales — the limit account should see business turnover in proportion to the limit.
- Diversion — use of short-term cash to buy property, machines or to fund group companies is a serious red flag.
- Security — the bank’s legal claim on your stock and unpaid bills, extra security (often property), and personal guarantees; property title and value must support the proposed limit.
What are letter of credit (LC) and bank guarantee (BG) limits?
Letters of credit (LC) help you buy from suppliers who want a bank promise to pay; bank guarantees (BG) support tenders, advances and performance promises. They do not put cash in your account at once, but the bank still counts the risk, so it sizes them with your cash loans and usually asks for a cash margin. For exporters, money before shipment (packing credit) and money after shipment link to export orders and bills.
What mistakes make the bank cut my working capital limit?
- Projecting 50% growth with no capacity or order book to support it.
- Debtors piling up beyond 90–120 days.
- Sales routed through another bank, so the limit account looks idle.
- Late or inconsistent stock statements, or values that don’t reconcile with financials.
- Funding a new factory from the cash credit account.
How do I renew, increase or move my working capital limit?
Limits are reviewed annually. A smooth renewal needs audited financials on time, a stock audit (for larger limits), updated CMA and a clean account. If your business has outgrown its limit, an enhancement proposal with fresh CMA and justification is the route. For a step-by-step view of how the renewal file itself is read, see how a bank checks a working capital renewal and money forecast; for ongoing help, see renewal & compliance support. If your bank is slow or expensive, a takeover by another bank — often combined with a term loan or LAP restructuring — can reduce cost and improve terms.
How big a limit can a business with ₹60 crore sales get?
Consider a Chennai engineering supplier with projected turnover of ₹60 crore next year:
| Projected current assets | ₹ crore |
|---|---|
| Raw material (45 days) | 5.5 |
| Work-in-progress and finished goods (30 days) | 4.0 |
| Receivables (75 days) | 12.3 |
| Other current assets | 1.2 |
| Total current assets (CA) | 23.0 |
| Less: creditors and other current liabilities (excluding bank finance) | 7.0 |
| Working capital gap | 16.0 |
| Less: borrower’s margin — 25% of CA | 5.75 |
| Maximum bank finance | 10.25 |
The bank can finance up to about ₹10.25 crore, provided the borrower’s net working capital (long-term funds in current assets) is at least ₹5.75 crore. If the balance sheet shows lower net working capital, the bank either reduces the limit or asks for more promoter funds, or a working capital term loan to cover the shortfall. Using the turnover method for the same business would suggest a much higher figure (20% of ₹60 crore = ₹12 crore) — but turnover-method limits are generally reserved for smaller exposures. The choice of method itself changes the answer.
How do stock audits and monitoring work?
For larger limits, banks appoint stock auditors who visit periodically to verify inventory, receivables and records against the stock statements you submit. Large mismatches — stock missing, obsolete stock included, old receivables reported as current — lead to DP reductions and erode the bank’s trust at renewal. Many banks also review quarterly financial updates (QIS) and monitor the account through analytics on utilisation and transactions. Treat monitoring as part of the facility, not an afterthought.
What is a working capital term loan (WCTL)?
When a business’s net working capital is lower than the margin the bank requires, the shortfall is sometimes bridged with a working capital term loan repaid over a few years. It restores the balance-sheet structure while the business builds long-term funds, and banks use it in restructuring and enhancement cases.
How JR Loan Advisors helps with working capital
As a CA with 20 years of experience with working-capital loans, I prepare cash-flow and assessment data that holds up, choose the method that fits your business, match you with banks whose appetite fits your sector and security, and support renewals. Working capital is usually a case where the lender does not pay advisors, so you may pay us a fee. We tell you the amount in writing before we start. See working capital loans or WhatsApp +91 94450 93336.
Self-serve packs (bank still decides): CMA data maker ₹999 · cash credit or overdraft (CC/OD) Enhancement ₹1,499 · free drawing power calculator · stock statement.
Sources (rules, not our prices): Working-capital assessment methods differ by bank. RBI expects proper monitoring of working capital; see RBI. This page is practice notes, not a limit offer.
Written and reviewed by CA Jitendraa Rathi, Chartered Accountant (CA membership number 217936) · Ex-banker, 20 years of experience in credit and lending · LinkedInLast reviewed · Expert review: CA Jitendraa Rathi (ICAI 217936)