Working Capital

Working Capital Limits Explained: Cash Credit, Overdraft and Drawing Power for Indian SMEs

24 Oct 2026

Quick answer

A working capital limit is a revolving credit line from a bank or NBFC that funds your day-to-day operations: stock, receivables and supplier payments. The most common forms in India are cash credit (secured by stock and debtors) and overdraft (often secured by fixed deposits or property). You pay interest only on the amount you use, but you can only draw up to your "drawing power", which is calculated each month from your stock and debtor statements after the lender's margin. To get the right limit, size it from your operating cycle, keep stock and debtor statements accurate, and avoid running the account at its maximum all the time.

Many growing businesses take a term loan when what they really need is a working capital line, or they get a cash credit limit and are then surprised that they can't draw all of it. Working capital limits are the most used, and least understood, form of business borrowing in India. Understanding how they're sized, how drawing power works and what lenders monitor will help you borrow the right amount at the right cost.

The main types of working capital limits

Fund-based facilities put cash in the account. Letters of credit and bank guarantees are commitments, not cash drawn.
Facility	What it funds	Typical security	How it works
Cash credit (CC)	Stock and receivables	Hypothecation of stock and book debts, often plus collateral	Revolving; draw up to drawing power, pay interest on usage
Overdraft (OD)	General working capital	Fixed deposits, property, or the business's cash flows	Revolving; draw up to the sanctioned limit
Working capital demand loan (WCDL)	Short-term needs, carved out of the CC limit	Same as cash credit	Fixed amount for a fixed short period, often at a lower rate
Bill or invoice discounting	Specific sales invoices	The receivable itself	Advance against an invoice, repaid when the buyer pays
Letter of credit (LC)	Purchases from suppliers	Within the overall limit, with margin	Bank guarantees payment to your supplier
Bank guarantee (BG)	Performance, advance or bid obligations	Margin money and collateral	Non-fund based; no cash drawn unless invoked

Fund-based limits (CC, OD, WCDL, bill discounting) involve actual cash. Non-fund-based limits (LC, BG) are commitments the lender makes on your behalf and usually carry a commission rather than interest.

How lenders size your limit

Lenders want the limit to match the real cash tied up in your operating cycle, not more and not less.

The operating cycle

Your working capital need comes from the time between paying for inputs and collecting cash from customers:

Operating cycle ≈ Inventory days + Debtor days − Creditor days

The longer the cycle and the bigger your sales, the more working capital you need.

Common sizing methods

Turnover method:commonly used for smaller MSME borrowers, where the limit is linked to a share of projected annual turnover, with part of the requirement expected to come from the promoter's own funds.
Holding level or MPBF method:the lender estimates the stock, debtors and creditors you'll hold at your projected sales, works out the gap, and expects you to fund a margin from long-term sources.
Cash budget method: used for seasonal or project-based businesses, where needs swing a lot across the year.

Whichever method your lender uses, your projections, inventory and debtor days, and past use of limits are what drive the number.

Drawing power: why you can't always use the full limit

Your sanctioned limit is the maximum. Your drawing power (DP) is what you can actually draw this month, based on the stock and debtors you report.

Drawing power ≈ (Eligible stock − Unpaid creditors for that stock) × (1 − Stock margin) + Eligible debtors × (1 − Debtor margin)

You can draw the lower of the sanctioned limit and the drawing power. Lenders typically exclude old debtors beyond a set age, slow-moving or obsolete stock, and related-party receivables. Margins and eligibility rules vary by lender and are written into your sanction letter.

An illustrative drawing power calculation

The numbers below are illustrative only. Amounts are in ₹ lakh, and the margins and eligibility rules are examples, not standard figures.

Illustrative figures in ₹ lakh. Available to draw is the lower of drawing power and the sanctioned limit.
Item	Amount	Notes
Stock (raw material, WIP, finished goods)	400	As per monthly stock statement
Less: unpaid creditors for stock	150	Stock not yet paid for
Paid stock	250
Less: stock margin at 25%	62.5
DP from stock	187.5
Debtors	350	Total receivables
Less: debtors older than 90 days	50	Not eligible in this example
Eligible debtors	300
Less: debtor margin at 25%	75
DP from debtors	225
Total drawing power	412.5
Sanctioned limit	500
Available to draw	412.5	Lower of DP and limit

Here, the business has a ₹5 Cr limit but can only use about ₹4.1 Cr. Collecting the ₹50 lakh of debtors older than 90 days brings in cash directly, and keeping receivables within the eligible age means more of them count towards drawing power.

What lenders monitor after sanction

Monthly stock and debtor statements, used to compute drawing power. Late or inaccurate statements can freeze your DP.
Stock audits for larger limits, where an auditor checks the stock and debtors physically and against your books.
Account conduct: whether the account stays within DP, how often it's overdrawn, and whether interest is serviced on time. Under RBI norms, a cash credit account that stays continuously over the limit or drawing power for more than 90 days can be classified as a non-performing asset.
Turnover routed through the account: lenders expect your sales receipts to flow through the CC account in proportion to the limit.
Annual renewal: limits are typically reviewed every year based on audited financials, projections and conduct.

Choosing between bank and NBFC limits

Banks usually offer cheaper cash credit and the full range of LC and BG facilities, but expect stronger financials, collateral and a track record.
NBFCs and fintech lenders may offer faster, more flexible lines, including invoice-based and unsecured working capital, at higher cost.
CGTMSE can help eligible micro and small enterprises get collateral-free working capital from member lenders.
TReDS and supply chain finance can complement a CC limit if you sell to large corporates.

Common mistakes

Using working capital limits for long-term assets. Buying machinery or funding losses from a CC limit squeezes daily liquidity. Use term loans or equity for long-term needs.
Asking for too little. An undersized limit leaves you constantly at the ceiling, which looks like stress to the lender.
Asking for too much without justification.Lenders reject or cut limits that your projections don't support, and unused limits may carry commitment charges.
Sloppy stock and debtor statements.Numbers that don't match your books or audit findings damage trust and can reduce DP.
Routing sales through other banks.If receipts don't flow through the lender's account, expect questions at renewal.
Ignoring margin and eligibility rules. Read your sanction letter so you know exactly how DP is computed.
Missing renewal deadlines. Late renewal submissions can lead to penal charges or reduced limits.

Your working capital limit checklist

Calculate your operating cycle: inventory, debtor and creditor days
Prepare realistic sales and working capital projections for the next 12 months
Decide which facilities you need: CC, OD, bill discounting, LC, BG
Clean up debtor ageing and identify slow-moving stock
Reconcile stock and debtor figures to your books
Understand margins, eligibility and DP rules in the sanction letter
Submit stock and debtor statements on time every month
Route sales receipts through the lender's account
Track utilisation against DP weekly, alongside your cash flow forecast
Prepare renewal documents well before the due date

How ImpactCFO helps

ImpactCFO founder Sudhir Singal has raised over ₹1,000 Cr of debt for a microfinance lender and has led finance at SuperPe, Happy Fintech and Sarala Microfinance. We work out the right size and mix of working capital limits for your business, prepare the projections and CMA data lenders ask for, set up accurate stock and debtor reporting, and negotiate terms with banks and NBFCs.

FAQs

What is the difference between cash credit and overdraft?

Cash credit is usually secured by your stock and receivables, and your drawing power changes with them each month. An overdraft is often secured by fixed deposits or property, and you can generally draw up to the sanctioned limit. Both are revolving and charge interest on the amount used.

What is drawing power?

Drawing power is the amount you can actually borrow under a cash credit limit at a point in time. It's calculated from the stock and debtors you report, after deducting unpaid creditors, ineligible items and the lender's margin.

How much working capital limit can my business get?

It depends on your turnover, operating cycle, financial strength and the lender's method. Lenders typically look at projected sales, inventory and debtor days, and how much of the need you fund from your own resources.

Is interest charged on the full limit?

On fund-based limits like cash credit and overdraft, interest is usually charged only on the amount you actually use. Some lenders levy commitment or non-utilisation charges on unused limits, so check your sanction letter.

Can I get a working capital limit without collateral?

Yes, in some cases. Eligible micro and small enterprises can get CGTMSE-backed limits, and many NBFCs and fintech lenders offer unsecured or invoice-backed working capital at higher rates.

How often is a working capital limit reviewed?

Most limits are renewed annually, based on audited financials, projections and account conduct. Lenders also monitor monthly through stock and debtor statements.

Book a free 30-minute strategy call to find out whether your working capital limits fit your business.

Book a free 30-minute strategy call