Collect, then protect
Collect over-age invoices largest-first. Put the MSME payment terms on every invoice if you're Udyam-registered, and offer large buyers payment through TReDS.
Answer five questions before you read on
Commit to an answer before you open each one. Together they show where your limit is going.
1Without looking, what was your drawing power on your last stock statement?
Most owners know their sanctioned limit to the rupee and their drawing power not at all. But drawing power is the number that decides what you can draw this month.
2Who prepared that statement, and did anyone check it against the books?
In many businesses the statement is filled in by whoever is free near the deadline. If it doesn't match the books, either you're losing limit you're entitled to, or a stock audit will one day take it away.
3Which of your customers have invoices older than the age limit in your sanction letter?
If you can't name them, you can't chase them. And every one of them is shrinking your limit right now.
4What has the CC paid for in the last two years that you still own?
A machine, a vehicle, a deposit for new premises, a loan to a sister concern. If it's still there, it isn't working capital, and it's sitting in your CC balance permanently.
5When was the limit last assessed, and what was your turnover then?
If sales have grown by a third since then, the limit may simply be too small. That needs a different conversation with the bank.
If you couldn't answer two of these, the bank knows more about your working capital than you do. This guide fixes that.
How your bank decides what you can draw
Your sanction letter sets a limit, the maximum the bank will ever lend on the account. But each month the bank also works out your drawing power from the stock statement you submit. You can draw only the lower of the two.
Drawing power
=
(Stock − unpaid creditors)less the stock margin
+
Receivables within the age limitless the receivables margin
Three ideas sit inside that formula:
- Paid stock only. Stock you bought on credit is already financed by your supplier, so the bank deducts your trade creditors before it lends.
- Young receivables only. Most sanctions ignore invoices older than a set age, commonly 90 days. Some allow more, some less. Yours is in the sanction letter.
- Your margin is your own money. The bank lends, say, 75% of paid stock and 60% of eligible receivables. The rest, 25% and 40% in this example, is the share it expects you to fund yourself. Margins vary by bank and by business.
The bank also expects the statement on time. Drawings supported by a statement that is too old, often more than three months, are treated as irregular. An account that stays irregular for 90 days can be classified as a non-performing asset. That's why a full CC account is more than an inconvenience.
Why "just collect faster" doesn't always work
The usual advice for a full CC account is to chase customers. Sometimes that's right. But it only fixes one of the five causes, and for the others it can make things worse:
- If long-term spending is sitting in the CC, collections come in and the balance falls for a few days, then fills up again. Nothing has changed.
- If the stock statement is wrong, collecting harder doesn't correct it. The next stock audit will.
- If the business has outgrown the limit, squeezing customers can cost you the growth that outgrew it.
- If margins are thin, faster collections only bring the date of the problem closer.
Find the cause first. Each one has its own fix.
Calculate drawing power yourself, then find what's eating it
Take last month's stock statement, your sanction letter and reconciled books. Enter the figures below:
Work out your drawing powerUse the margins in your sanction letter
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Now compare your result with the five causes:
| Cause | How it shows | The fix |
|---|---|---|
| Old receivables | Large amounts past the age limit; drawing power below the limit | Collect over-age invoices first; MSME terms; TReDS |
| Statement errors | The statement doesn't match the books; stock audit findings | Prepare it from reconciled books, valued at cost |
| Long-term spend | The balance never falls, even after big collections; weak current ratio | Convert to a term loan; bring in long-term funds |
| Outgrown limit | Drawing power above the limit; turnover far above the last assessment | Enhancement backed by projections and CMA data |
| Thin margin | The balance creeps up every month, whatever you collect | Price, mix and cost, before any new borrowing |
If old receivables are the issue, see how much collecting them would give back:
What collecting old receivables gives backExample figures · replace with yours
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Check your stock statement the way a stock auditor would
Before you blame the bank, check the document you gave it. Six checks catch almost every problem:
- It matches the trial balance. Stock, receivables and creditors on the statement agree with the books on the same date.
- Stock is valued at cost, or at realisable value where that's lower. Never at selling price.
- Dead stock is excluded. Obsolete, damaged, rejected or expired items don't belong on it.
- Only the right creditors are deducted. Creditors for the stock you're declaring, not capital creditors or expenses.
- Receivables are aged correctly, from invoice date, with nothing older than the limit counted.
- Non-trade receivables are left out: loans to staff or group companies, advances, deposits, scheme claims and TDS credit.
Then check whether the bank sees your business as a lender would. These are the ratios a credit officer reads first:
Check the ratios your bank checksFrom your balance sheet and P&L
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Six businesses, six different reasons the limit was full
The same symptom has a different cause in every industry. Pick the business closest to yours:
These are composite businesses with illustrative figures, built to show how the method works. They are not CFOSurge client results.
FMCG distributor, ₹45 crore turnover, ₹6 crore CC
Drawing power (₹ lakh, illustrative)
| Stock as per stock statement | +520 |
| Less: unpaid creditors for that stock | −260 |
| Less: 25% margin on paid stock | −65 |
| Receivables from retailers | +610 |
| Less: receivables over 90 days | −140 |
| Less: 30% margin on eligible receivables | −141 |
| Drawing power | +524 |
The diagnosis
The distributor is drawing ₹590 lakh against drawing power of ₹524 lakh: ₹66 lakh above. Two things did it. Retailer credit has crept past 90 days for ₹140 lakh, mostly with small accounts that order less often. And half the stock was bought on the principal's credit, which the bank rightly deducts.
The principal's scheme and claim money (₹34 lakh) isn't on the statement at all. Banks usually don't treat it as a book debt, but the owner had been counting it as "money coming in".
The full solution, in order
- Split the retailer book. Rank every retailer by days outstanding and order frequency. Put the slowest 15% on a 15-day limit or cash-and-carry.
- Collect the ₹140 lakh over 90 days first. Every rupee collected restores 70 paise of drawing power and cuts interest.
- Stop cash discounts that don't pay for themselves. A 1.5% discount for paying in 30 days only makes sense if it actually changes behaviour. Check who takes it and still pays late.
- Chase the principal's claims on a calendar. Submit scheme claims monthly, with complete documents, and forecast their receipt.
- Plan the festive peak in advance. Ask for an ad hoc limit six weeks before the season, backed by last year's peak stock figures.
Don't do this
- Declaring scheme receivables as book debts on the statement.
- Extending retailer credit to win volume in a slow month.
- Buying extra stock for a price-increase scheme without checking drawing power.
Numbers to watch every month
- Receivables over 60 and 90 days, by retailer
- Drawing power vs amount drawn, weekly
- Stock days by principal
- Claims receivable from principals
Auto-component maker, ₹38 crore turnover, ₹3 crore CC
Drawing power (₹ lakh, illustrative)
| Stock: raw material, WIP, finished parts | +270 |
| Less: unpaid creditors for that stock | −90 |
| Less: 25% margin on paid stock | −45 |
| Receivables from OEMs | +240 |
| Less: invoices over 90 days | −65 |
| Less: 40% margin on eligible receivables | −70 |
| Drawing power | +240 |
The diagnosis
Drawn ₹285 lakh against drawing power of ₹240 lakh. The business grew by more than a fifth, with two OEMs that pay in 96 days, so ₹65 lakh of perfectly good invoices now count for nothing. The growth made the ageing problem worse.
The unit is a small enterprise registered on Udyam, but none of its invoices mention the MSME payment terms, and it has never raised interest on late payment.
The full solution, in order
- Print the MSME terms on every invoice. State the agreed credit period (never more than 45 days) and the Udyam number.
- Put the two slow OEMs on TReDS. Ask their purchase teams to accept invoices on a TReDS platform. You're paid early, and the discount rate is based on the OEM's credit, not yours.
- Negotiate with evidence. Show each OEM the interest the MSMED Act entitles you to and the deduction they lose by paying late. You don't have to claim it; you need them to know it.
- Ask for an enhancement on the new turnover. The limit was assessed on sales of ₹31 crore. Present CMA data on ₹38 crore.
- Reprice for the terms. If an OEM insists on 90 days, the cost of financing those days belongs in the piece price.
Don't do this
- Accepting a new OEM schedule without checking the drawing power it needs.
- Staying silent on MSME rights for fear of losing the customer.
- Funding tooling for a new OEM programme from the CC.
Numbers to watch every month
- OEM-wise days outstanding
- Invoices within 15 days of the age limit
- Drawing power headroom, weekly
- Cash cost of each OEM's terms
Tiruppur garment exporter, ₹60 crore turnover
Pre-shipment and post-shipment position (₹ lakh, illustrative)
| Packing credit drawn | 760 |
| Of which: past its liquidation date | 190 |
| Export bills sent, unpaid by buyers | 540 |
| Of which: overdue beyond the agreed date | 120 |
| Export incentives receivable | 85 |
| Packing credit that is out of order | ₹190 lakh |
The diagnosis
The exporter isn't short of orders. It's short of usable limit. ₹190 lakh of packing credit wasn't liquidated by export proceeds on time because two buyers paid late, so the bank won't release fresh packing credit against new orders until it's cleared. The CC is being used to fill the gap, so it's full too.
Export incentive receipts of ₹85 lakh are real money, but they arrive on the government's timetable, not the exporter's.
The full solution, in order
- Liquidate the overdue packing credit first. Use the next export proceeds to clear the oldest packing credit, and ask the bank to run it on a first-in-first-out basis.
- Move slow buyers to letters of credit or advance. The two buyers who paid late should be on LC terms for the next season.
- Discount accepted bills. Get post-shipment finance against accepted export bills instead of waiting for the buyer.
- Ask for a separate post-shipment limit. Keep export bills out of the domestic CC entirely.
- Forecast incentive receipts conservatively. Plan for them later than expected and treat any early receipt as a bonus.
Don't do this
- Shipping to a buyer who is already overdue on two invoices.
- Using CC money to buy fabric for an export order.
- Letting realisation run close to the deadline FEMA allows.
Numbers to watch every month
- Packing credit by order and liquidation date
- Export bills overdue, by buyer
- Incentives receivable and their age
- Forex exposure on unhedged bills
API intermediates maker, ₹80 crore turnover, ₹12 crore CC
Drawing power after the stock audit (₹ lakh, illustrative)
| Stock as declared in the statement | +1,500 |
| Stock auditor's adjustment: valued at cost, not selling price | −240 |
| Less: unpaid creditors for that stock | −620 |
| Less: 25% margin on paid stock | −160 |
| Eligible receivables | +950 |
| Less: 30% margin | −285 |
| Drawing power | +1,145 |
The diagnosis
Before the audit, the statement supported the full ₹1,200 lakh limit. After it, drawing power fell to ₹1,145 lakh while ₹1,180 lakh was drawn. The finished goods had been valued at selling price on the statement but at cost in the books, and nobody had noticed the difference. This is a statement problem, and it hurt the company's credibility with the bank as much as its limit.
The full solution, in order
- Align the statement with the books. Value stock at cost, or at realisable value if lower, exactly as in the accounts. Reconcile it to the trial balance before every submission.
- Exclude slow and expired batches yourself. Material past its retest date shouldn't be on the statement. Removing it before the auditor finds it protects your credibility.
- Write to the bank first. Explain the correction, show the reconciliation, and propose how the excess will be brought down. Banks treat a borrower who corrects their own statement very differently from one an auditor catches.
- Clear the excess with collections. ₹35 lakh is about two weeks of normal collections. Prioritise receivables that will soon cross the age limit.
- Put stock valuation in the monthly close. The same valuation sheet feeds the books, the MIS and the bank.
Don't do this
- Valuing stock one way for the bank and another for the books.
- Leaving expired or rejected batches on the statement.
- Waiting for the bank to notice an irregularity before explaining it.
Numbers to watch every month
- Statement value vs book value, monthly
- Slow-moving and near-expiry stock
- Creditors deducted vs creditors in the books
- Days to the next stock audit
Electrical contractor, ₹25 crore turnover, ₹2.5 crore CC
Drawing power (₹ lakh, illustrative)
| Running-account bills raised | +380 |
| Less: retention money held by clients | −95 |
| Less: bills older than 90 days | −70 |
| Less: 40% margin on eligible bills | −86 |
| Material at site, paid for | +60 |
| Less: 25% margin | −15 |
| Drawing power | +174 |
The diagnosis
Drawn ₹245 lakh against drawing power of ₹174 lakh: ₹71 lakh above. Contractors feel this most because so much of their money is in forms banks don't lend against: retention, uncertified work and bills stuck in the client's approval chain.
Most of the old bills are government work held up at measurement and approval, not at payment.
The full solution, in order
- Bill on a fixed day each month. Raise RA bills for all measured work on the same date, with complete measurement sheets, so they can't come back.
- Track every bill through the client's approval chain. Know whose desk each bill is on. Most delay in government work is at certification.
- Replace cash retention with bank guarantees. Where the contract allows it, a performance guarantee releases cash retention, and BG margin usually costs far less.
- Ask for mobilisation advances on new contracts. Secured by an advance bank guarantee, they fund the start-up phase that otherwise drains the CC.
- Price working capital into tenders. If a client is known to certify in 120 days, the finance cost belongs in the bid.
Don't do this
- Starting work on variations without written approval.
- Bidding on a new project without checking the drawing power it needs.
- Funding equipment purchases from the CC.
Numbers to watch every month
- RA bills by stage: raised, measured, certified, paid
- Retention by project and release date
- Drawing power vs drawn, weekly
- Bank guarantee limits in use
IT services company, ₹12 crore revenue, ₹1.5 crore book-debt limit
Drawing power (₹ lakh, illustrative)
| Receivables from clients | +210 |
| Less: invoices over 90 days | −40 |
| Less: 30% margin | −51 |
| Drawing power | +119 |
The diagnosis
Drawn ₹148 lakh against drawing power of ₹119 lakh. Receivables are healthy for a services business. The real problem is that a ₹45 lakh office fit-out and laptops were paid from the book-debt limit. They'll never turn into receivables, so about ₹45 lakh of the balance is permanent. This is a long-term spend problem.
The full solution, in order
- Convert ₹45 lakh into a term loan. Ask the bank to carve the fit-out out of the working-capital limit into a 3–5 year term loan. The CC then has room to breathe.
- Lease laptops from now on. Or buy them on a separate equipment loan.
- Bill monthly, on day one. Raise invoices on the first working day for the previous month's work, with timesheets attached so clients can't query them.
- Collect the ₹40 lakh over 90 days. Escalate past the accounts team to the client's business owner.
- Track TDS credits. Clients deduct TDS. Reconcile it with 26AS every quarter, so receivables aren't overstated by tax already paid on your behalf.
Don't do this
- Paying for fit-outs, deposits or acquisitions from the working-capital limit.
- Carrying TDS deducted by clients as a receivable.
- Letting milestone invoices wait for 'project completion'.
Numbers to watch every month
- Days sales outstanding by client
- Unbilled revenue at month-end
- Permanent ('hardcore') CC balance
- TDS receivable vs 26AS
Hover over a business for a preview (tap on a phone), then click to open the full case.
What to do, cause by cause
Old receivables
Statement
Rebuild it from the books
Use the six checks above every month. If you find an error, tell the bank before it finds it.
Long-term spend
Convert it
Ask the bank to move the hardcore part of the balance into a term loan, often called a working-capital term loan, repaid over the life of what it bought.
Outgrown
Ask for an enhancement properly
Bring projected financials, CMA data, receivables ageing and the order book. For smaller limits, many banks use the turnover method below.
Thin margin
Fix the margin first
Work out contribution by product and customer, re-price the bottom fifth, and cut the cost of finance before asking for more.
The turnover method, in one minute
For smaller MSE working-capital limits, many banks assess the requirement as 25% of projected annual turnover, of which the bank finances 20% and expects the promoter to bring 5%. On projected sales of ₹20 crore, that's a ₹5 crore requirement and a ₹4 crore limit. If your current limit is far below that, you have a case. For larger limits, banks usually assess from a cash budget or projected balance sheets instead.
Already above drawing power? The 14-day plan.
- Days 1–2: calculate today's drawing power from the books and the exact excess.
- Days 2–5: collect the three largest over-age receivables, and hold non-essential payments.
- Days 5–7: meet or write to the branch. Explain the cause and the date the excess will be cleared. Don't let them find out from the system.
- Days 7–14: submit a corrected, reconciled stock statement, and ask about an ad hoc limit or a term-loan conversion if the cause is structural.
A 30-minute monthly routine that keeps the limit healthy
- Close the books by the 5th working day. The statement can only be as good as the books.
- Calculate drawing power yourself before the statement goes in. Compare it with the amount drawn.
- List receivables within 15 days of the age limit, and call them this week, before they drop out.
- Check for long-term payments from the CC that month. Move them to the right account or loan.
- Update the 13-week cash forecast with drawing power as a line, not just the bank balance.
- Eight weeks before renewal, prepare provisional financials, projections and the CMA data. Walk into the meeting with them.
Five mistakes that make a full limit worse
- Window-dressing the statement. Inflating stock to draw more works until the stock audit. Then you lose the limit and the bank's trust together.
- Moving money between group accounts to show credits. Banks recognise circular transactions, and they read them as a warning sign.
- Paying capital items from the CC "just for now". Temporary hardcore balances have a way of becoming permanent.
- Asking for an enhancement after the account is irregular. Ask while the conduct is clean. It's a far easier conversation.
- Ignoring the MSME rules on both sides. If you are Udyam-registered, use your rights. If you buy from micro and small enterprises, pay them on time, or the tax deduction waits until the year you actually pay.
Official sources and guidance
Rules, rates and thresholds change. Check the current position at these official sources before acting.
- Reserve Bank of IndiaMaster circulars on income recognition and asset classification, and on lending to MSMEs
- MSME Samadhaan (delayed payment portal)Filing delayed-payment cases under the MSMED Act
- Udyam RegistrationMSME registration and certificate verification
- Income Tax DepartmentThe Income-tax Act and the MSME payment deduction rule
ReferenceKey terms in plain English
12 terms
- Cash credit (CC)
- A running working-capital account. You draw and repay freely up to your drawing power, and pay interest only on what you use.
- Drawing power (DP)
- The amount you may draw this month: paid stock plus eligible receivables, each less the bank's margin, capped at the sanctioned limit.
- Stock statement
- The monthly statement of stock, receivables and creditors you submit to the bank. Drawing power is calculated from it.
- Margin
- The share of stock or receivables the bank won't finance, which you fund yourself.
- Book debts
- Trade receivables from customers for goods or services sold.
- Hardcore balance
- The part of a CC balance that never comes down, usually because it has funded long-term assets, losses or withdrawals.
- CMA data
- Credit Monitoring Arrangement data: a standard set of past and projected financial statements and ratios that banks use to assess working-capital limits.
- TOL/TNW
- Total outside liabilities divided by tangible net worth: how much the business owes compared with what the owners have in it.
- DSCR
- Debt service coverage ratio: cash profit available to pay loan instalments and interest, divided by those instalments and interest.
- TReDS
- The Trade Receivables electronic Discounting System, regulated by the RBI, where MSMEs' invoices on large buyers are discounted by financiers at rates based on the buyer's credit.
- Packing credit
- Pre-shipment export finance against a confirmed order or LC, repaid (liquidated) from the export proceeds.
- Udyam registration
- The government's registration for micro, small and medium enterprises. It's needed to claim MSME payment protections.
Questions owners also ask
How is drawing power calculated?
Drawing power is (stock less unpaid trade creditors for that stock) less the stock margin, plus (receivables within the bank's age limit) less the receivables margin, capped at the sanctioned limit. The margins and the age limit are set in your sanction letter.
Why does my bank reduce my drawing power?
Usually because receivables have aged past the limit the bank allows, creditors have increased, stock has fallen, or a stock audit revalued the stock. A late stock statement can also leave drawings unsupported.
What happens if my CC account is above drawing power?
The bank sees the account as irregular. If it stays out of order for 90 days, the account can be classified as a non-performing asset, which affects your credit rating and future borrowing. Speak to the bank early and clear the excess.
Can a CC limit be converted into a term loan?
Often, yes. If part of the balance has funded long-term assets or losses, banks can carve it out into a working-capital term loan repaid in instalments, which leaves the CC for genuine working capital.
How do I get my CC limit enhanced?
Prepare provisional and projected financials, CMA data, receivables ageing, the order book and the reasons for growth. Apply before the account goes irregular, ideally eight weeks before the renewal date.
Does the MSME 45-day rule help with my CC limit?
Indirectly. If you're a Udyam-registered micro or small supplier, the MSMED Act caps buyer credit at 45 days and entitles you to interest on delay. If they pay you late, buyers also get their tax deduction only in the year they actually pay. Together these give you leverage to collect faster, which keeps receivables inside the bank's age limit.
Want a CFO to look at your stock statement with you?
If your limit is full and the reason still isn't clear, or it is and you want help with the bank, a CFOSurge CFO can go through your sanction letter, stock statement and receivables with you and prepare the case for your next renewal.
- Plans from ₹50,000 a month, fixed after a free assessment
- Free consultation with a senior CFO
- No cost, no obligation
- Pay nothing if you don't see value in the first 2 weeks