What is a working capital limit?
Every business has money tied up between paying for goods and getting paid by customers. Raw material is bought, stock sits on shelves, and buyers take 30, 60 or 90 days to settle. A working capital limit funds that gap.
Unlike a term loan, you do not receive a lump sum. The lender sanctions a limit on a current-type account. You draw from it when payments are due and deposit money when collections come in, paying interest only on the balance you use.
Cash credit, overdraft and drop-line OD compared
| Facility | Usually secured by | How the limit behaves |
|---|---|---|
| Cash credit (CC) | Hypothecation of stock and receivables | Moves with drawing power from monthly stock statements |
| Overdraft (OD) | Property, FDs or other assets | Fixed limit, reviewed at renewal |
| Drop-line OD | Mostly property | Reduces on a set schedule over the tenure |
How lenders size your limit
For smaller MSME limits, many banks start from a turnover-based estimate. For larger ones, they assess your operating cycle using projected financials.
Drawing power in a CC account is worked out from your stock and receivables after a margin. As an illustration, if you declare ₹40 lakh of stock and ₹20 lakh of eligible receivables and the lender applies a 25% margin, your drawing power would be ₹45 lakh, capped at the sanctioned limit. Actual margins and which receivables count are set by each lender.
The margin is your own money in the cycle. Lenders also usually exclude old receivables, often those beyond a set number of days, and slow-moving or obsolete stock, so a business with a long collection period can end up with less drawing power than its books suggest.
Running the account well
A working capital limit is reviewed constantly, not just at sanction. A few habits make renewals much smoother:
- Submit stock statements on time and keep them consistent with your books and GST returns.
- Route sales through the account. Lenders want to see the limit moving, not sitting fully drawn for months.
- Avoid staying above drawing power. An account that stays out of order for 90 days can be classified as a non-performing asset under RBI norms.
- Plan renewals early, with audited figures ready, so the limit does not lapse.
Our team compares CC and OD offers from 40+ banks and NBFCs, helps prepare the file and stays involved through each annual renewal.
