For any growing business, working capital is the fuel that keeps daily operations running smoothly. While banks may sanction a certain working capital limit, the amount a business can actually use depends on something called Drawing Power (DP). Understanding how banks assess drawing power can help business owners manage cash flow better and avoid sudden funding constraints.
What Is Drawing Power?
Drawing power is the maximum amount a business can withdraw from its working capital facility at a given time. Even if a bank sanctions a higher limit, the usable amount depends on the current value of the business’s working capital assets. Banks use drawing power to ensure that short-term loans are backed by real, liquid assets. This makes drawing power a dynamic number that changes as stock levels and receivables fluctuate.
Why Banks Calculate Drawing Power
Banks calculate drawing power to control risk and ensure responsible lending. Since working capital loans are usually secured against stock and receivables, banks want to be sure these assets are sufficient to cover the money borrowed. Drawing power also helps banks monitor the financial health of a business on an ongoing basis. If inventory drops or receivables become slow-moving, the drawing power reduces automatically, limiting further withdrawals.
Key Components Used in Drawing Power Calculation
Banks primarily look at current assets that can be converted into cash in the short term. The most common components are stock (inventory) and book debts (accounts receivable), adjusted for margins and liabilities. Not all assets shown in the books are accepted at full value. Banks apply eligibility rules, age limits, and safety margins before arriving at the final drawing power.
Stock (Inventory)
Stock includes raw materials, work-in-progress, and finished goods used in the normal course of business. Banks only consider stock that is paid for, properly valued, and insured. Slow-moving, obsolete, or damaged inventory is usually excluded. Regular stock statements and inspections help banks verify the actual quantity and quality of inventory.
Book Debts (Accounts Receivable)
Book debts are amounts owed by customers for goods sold or services rendered. Banks generally accept only receivables that are within a specified period, commonly 60 to 90 days. Old or doubtful receivables are excluded because they may not be collected on time. Banks also look at the creditworthiness and concentration of customers while assessing receivables.
Creditors and Other Current Liabilities
Trade creditors represent money the business already owes to suppliers. Since these liabilities reduce the net working capital requirement, banks deduct them while calculating drawing power. Other short-term liabilities may also be adjusted depending on the bank’s internal policy. The goal is to arrive at the net value of current assets funded by the business.
Margin Requirement Applied by Banks
Banks never finance 100% of working capital assets. A margin is kept as a safety buffer, typically ranging from 20% to 40%, depending on the nature of the business and asset quality. This margin ensures that the borrower has their own stake in the business operations. After applying the margin, the remaining value becomes eligible for bank finance.
The Basic Drawing Power Formula
In simple terms, drawing power is calculated as:
(Eligible Stock + Eligible Book Debts – Creditors) × (1 – Margin Percentage)
This formula ensures that funding is linked directly to real-time business activity. As assets increase or decrease, drawing power adjusts accordingly.
| # | Particulars | Explanation | Amount (₹) |
|---|---|---|---|
| 1 | Value of Stock (Inventory) | Eligible value of raw materials, work-in-progress and finished goods considered by the bank | 500,000 |
| 2 | Eligible Book Debts | Add: Customer receivables within acceptable ageing (generally up to 60–90 days) | 300,000 |
| 3 | Total Current Assets | Total of eligible stock and book debts (Step 1 + Step 2) | 800,000 |
| 4 | Trade Creditors | Less: Payables to suppliers, deducted as they already finance part of working capital | -200,000 |
| 5 | Net Eligible Current Assets | Assets that actually require bank finance (Step 3 − Step 4) | 600,000 |
| 6 | Bank Margin (25%) | Less: Safety margin kept by the bank; only 75% of assets are financed | -150,000 |
| 7 | Drawing Power (DP) | Maximum amount the business can withdraw from its working capital limit | 450,000 |
Frequency of Drawing Power Assessment
Drawing power is not a one-time calculation. Banks usually reassess it monthly or quarterly based on stock and debtor statements submitted by the borrower. Delays, inaccuracies, or non-submission of statements can lead to a reduced drawing power or even temporary suspension of withdrawals. Consistent reporting is therefore critical.
Drawing Power vs Sanctioned Working Capital Limit
The sanctioned limit is the maximum amount approved by the bank under the loan agreement. Drawing power, on the other hand, is the actual usable limit at any point in time. A business can only withdraw up to the lower of the sanctioned limit or the drawing power. Even if the sanctioned limit is high, low current assets can restrict access to funds.
Factors That Can Reduce Drawing Power
Drawing power may reduce due to lower inventory levels, delayed customer payments, or higher creditor balances. Poor-quality receivables and uninsured stock can also impact eligibility. Economic slowdowns, seasonal fluctuations, and operational inefficiencies often reflect directly in drawing power, making it an early warning signal for cash flow stress.
Why Drawing Power Matters for Businesses
Understanding drawing power helps businesses plan inventory purchases, manage credit terms, and avoid sudden liquidity shortages. It also enables better communication with bankers during reviews and renewals. A well-managed drawing power improves trust with lenders and can support future credit enhancements. For businesses dependent on working capital finance, DP is a number worth tracking closely.
Key Takeaway: Drawing power is the backbone of working capital financing. It connects bank funding directly to the real operating strength of a business, rather than just projected numbers. By maintaining accurate records, managing receivables efficiently, and keeping inventory healthy, businesses can optimize their drawing power and ensure smooth access to working capital when it’s needed most.
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