When businesses use working capital loans or overdraft facilities, a key concept that often determines how much credit they can actually access is drawing power.
While it might not be as commonly discussed as profit or revenue, understanding drawing power is essential for managing day-to-day cash flow. Simply put, drawing power is the amount a lender allows a business to withdraw from its sanctioned credit limit, based on the value of current assets like receivables and inventory.
The drawing power calculation helps determine this limit, and it’s influenced by factors such as asset quality, aging of receivables, and loan terms.
In this blog, we’ll explore what drawing power means, how the calculation works, and why it’s a critical piece of your business’s financial puzzle.
What Is Drawing Power?
Drawing power refers to the actual amount a borrower is eligible to withdraw from their sanctioned working capital limit, based on the value of specific current assets like inventory and accounts receivable. It’s a dynamic figure that fluctuates based on the company’s asset position and is recalculated periodically, often monthly, by the lender.
While a business may be sanctioned a larger credit limit, the drawing power ensures that the company only accesses funds against tangible, verified assets. This acts as a safeguard for both the lender and borrower, ensuring credit exposure remains in check.
For example, if a company has ₹50 lakhs in receivables and ₹30 lakhs in inventory, the drawing power calculation—after applying margin requirements—will determine how much of that total asset value can actually be borrowed.
How Is Drawing Power Calculated?
Understanding the drawing power calculation helps businesses better manage their cash flow and plan financing needs. Lenders use a specific formula to determine how much credit a company can actually draw from its sanctioned limit, based on the value of current assets, adjusted for margins.
Drawing Power Formula
The typical formula is:
Drawing Power = (Eligible Inventory + Eligible Receivables) – Margin
Let’s break this down:
- Eligible Inventory: The value of raw materials, finished goods, and stock-in-trade that are acceptable to the bank. Obsolete or slow-moving inventory is often excluded.
- Eligible Receivables: Trade receivables that are not overdue beyond a certain period (usually 90 days).
- Margin: A buffer that the lender deducts to cover risk—commonly 20–25%, but this can vary.
Example
If your business has:
- ₹40 lakhs in eligible inventory
- ₹30 lakhs in eligible receivables
- And the bank requires a 25% margin
Drawing Power = (40 + 30) – 25% of (70) = ₹52.5 lakhs
This means you can withdraw up to ₹52.5 lakhs, even if your sanctioned limit is ₹70 lakhs.
Factors That Affect Drawing Power
Drawing power isn’t a fixed number—it changes over time depending on several business and financial factors. Here are some of them:
- Quality of Inventory
Not all inventory is eligible. Banks typically exclude:
- Obsolete or slow-moving stock
- Damaged goods
- Non-moving inventory
Only clean, saleable inventory contributes positively to drawing power.
- Age of Receivables
Receivables older than 90 days are usually not considered in the drawing power calculation. Businesses must maintain a steady collection cycle to ensure receivables remain eligible.
- Business Turnover
Higher turnover can positively influence drawing power by demonstrating consistent operations and asset movement. Stagnant sales may lead to a reevaluation of your credit exposure.
- Bank’s Margin Requirement
The margin is the portion of assets that the bank does not finance. A higher margin reduces drawing power. Margins can vary based on industry risk, borrower history, and loan type.
- Regular Stock and Receivables Statements
Lenders require monthly or quarterly submissions of stock and receivable statements. Any delay or inconsistency in these reports can affect drawing power availability.
Conclusion
Drawing power is more than just a financial metric—it’s a critical tool that directly impacts a business’s access to working capital.
By understanding how drawing power is calculated and what influences it, businesses can take control of their cash flow, avoid liquidity crunches, and stay financially agile. Regular monitoring, accurate reporting, and asset management are key to maximizing your eligible credit.
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