Working capital is the oxygen of every MSME business. Without it, operations stop. With too much strain on it, businesses suffocate. And yet, most entrepreneurs don’t realize how deeply bankers study working capital before making loan decisions. Even if EMIs are on time, a poorly managed working capital cycle can cause reduced drawing power (DP), stricter terms, and loss of banker confidence.
In this blog, let’s understand how banks judge your working capital, the mistakes MSMEs often make, and the smart steps you can take to stay credit-healthy.
What Is Working Capital Really?
Yes, in accounting terms, working capital = Current Assets – Current Liabilities.
But in real business life, working capital is:
- The time your money is locked in stock.
- The credit you extend to customers.
- The delay in payments you give to suppliers.
- And the gap you need to finance in between.
Example:
- Raw material → 30 days in production
- Finished goods → 15 days in stock
- Customer payment → 45 days waiting
Total cycle = 90 days.
That means for 3 months your money is locked — unless the bank steps in to fund this cycle.
The Banker’s Lens: Stock, Receivables, Margins
When you apply for or operate a cash credit/OD limit, bankers don’t just give money and walk away. They monitor your working capital every month.
They ask for:
- Stock statements
- Debtor lists (age-wise receivables)
- Creditor lists
Why? Because Drawing Power (DP) is calculated as:
Eligible Stock + Eligible Receivables – Margin = DP
Example:
- Stock = ₹100 lakh
- Debtors within 90 days = ₹80 lakh
- Total = ₹180 lakh
- Less margin (25%) = ₹45 lakh
- Eligible DP = ₹135 lakh
If your sanctioned limit is ₹150 lakh, you can only draw ₹135 lakh this month.
This is why many entrepreneurs say, “Bank ne limit kam kar di.”
Truth: the bank didn’t reduce the limit. Your DP didn’t support it.
Common Mistakes MSMEs Make
Here’s where things go wrong for many businesses:
- Delayed stock statements → Without them, DP can’t be calculated, and your account gets restricted.
- Inflated receivables → Showing old debtors as “current.” Banks exclude 180+ day debtors, lowering DP.
- Frequent cheque returns → Even one or two per month creates doubt about your conduct.
- Excessive customer credit → Extending 120–180 days credit may look like growth but kills cash flow.
- Mixing personal & business spends → Instantly reduces banker trust.
Real story: A client with a ₹2 crore limit discovered that, after excluding old debtors, his DP allowed only ₹1.25 crore. His surprise wasn’t the bank’s fault — it was his weak receivables control.
Why Working Capital Matters So Much to Banks
For bankers, working capital management is the mirror of your business discipline.
- Regular stock statements = reliable management.
- Healthy receivables = good customer control.
- Balanced creditors = supplier trust.
- Predictable cycle = repayment comfort.
If these are strong, bankers trust you. If not, they tighten terms.
The Smart Borrower’s Checklist
Here’s how to stay ahead:
- Submit stock & debtor statements on time.
- Keep receivables realistic — don’t hide bad debts.
- Monitor your cycle: Inventory days + receivable days – payable days.
- Avoid cheque returns at all costs.
- Keep personal and business spends separate.
- Review DP calculations monthly with your CA or finance team.
Remember working capital is not “paperwork.” It’s the lifeline of your business.
Final Thought
Working capital is the silent deal-maker or breaker in MSME finance. It decides how much you can draw, how much bankers trust you, and how smoothly your business breathes.
👉 Share this with a fellow entrepreneur or colleague who struggles with managing cash flow. Awareness about working capital is not optional — it’s survival.
🎧 And if you’d rather listen than read, tune in to the full podcast episode: Smart Credit Bytes – Episode 12: Working Capital Secrets on Spotify.
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