Every August, the same misunderstanding shows up on credit desks. Most business owner expect enhancement because their revenue grew by 20% over the last two quarters. Then their facility offer letter arrives with a clause that catches them off guard with the headline their Cash Credit limit has not been enhanced, and the actual drawing power available has dropped by 30%.
The reason is very clear banks don’t fund revenue. They fund the Borrowing Base and those are two different numbers. Here’s what actually happens when Drawing Power gets calculated each month. It starts with gross inventory and trade debtors, and three deductions typically follow.
The debtors that don’t count
Receivables older than 90 or 120 days are already excluded under most facility letters and honestly that part is quite expected. Less obvious part is that age isn’t the only filter. A disputed or unreconciled invoice gets excluded too, and not just partially. If a buyer withholds 10% pending a quality query, the entire invoice is usually flagged as disputed and pulled from eligible debtors, not just the disputed portion. Your one unresolved vendor dispute can remove a chunk of usable liquidity overnight.
Paid stock vs. unpaid stock
Under the standard formula built on Tandon/Nayak norms and their cash-flow variants, banks finance stock that’s been paid for not stock sitting on supplier credit.
Eligible Inventory = (Raw Materials + WIP + Finished Goods) − Sundry Creditors
If ₹1 crore of raw material was bought on 60-day supplier terms, that stock is unpaid, so the formula strips out the full ₹1 crore before the advance margin is even applied. Drawing on a CC limit while also carrying heavy unpaid supplier credit reads as a double-financing signal to the bank and tends to restrict the next drawdown rather than expand it.
Stock that’s stopped moving
Raw material sitting for more than 60 days without moving into WIP typically attracts a haircut on its collateral value, often in the 25–50% range depending on bank policy. It doesn’t matter if the commodity price is rising or stagnant inventory is treated as illiquid collateral, regardless of market value.
What separates a smooth renewal from a stuck one.
It’s rarely the businesses with the strongest revenue growth that move through renewal fastest but it’s the ones whose numbers are clean. Payables that aren’t quietly stacking up against an already-drawn CC limit. Retention amounts tracked as separate debit notes rather than buried inside one disputed invoice. Stock statements that are ageing-categorized and submitted early rather than assembled the week they’re due. None of this changes the underlying formula. It changes whether the numbers feeding into that formula are current and defensible which, more than revenue growth, is usually what decides how fast a renewal moves.
Key Take away:
A approved limit is the ceiling but the Borrowing Base is the floor a business actually stands on. Understanding how that floor is calculated like debtor ageing, payable timing, inventory ageing can turn working capital from a recurring point of friction into something that can be planned around.
This post is educational and reflects general industry practice not the policy of any specific institution, and not financial or credit advisory services.