Working Capital Loans & CC Limits

The 20% figure is a floor, not a cap. A bank can sanction more if your operating cycle justifies it. It rarely sanctions less.

How much working capital limit will a bank give me?

Start with your projected annual turnover for the coming year. Take 25% of it as the total working capital need. You fund a fifth of that yourself as margin. The bank funds the rest. That is where the 20%-of-turnover number comes from.

So a business projecting ₹2 crore of turnover is looking at a limit near ₹40,00,000. Push the projection higher and the limit rises with it. Banks know this. They will ask for order books, GST returns and past invoices to test the number.

Above ₹5 crore of limit, the turnover method stops applying. Banks move to a full assessment of your operating cycle instead.

What is drawing power, and why is my usable limit lower than my sanction?

Your sanction is a ceiling. Drawing power is what you can draw today. The two are almost never the same, and this is the single biggest surprise for a first-time borrower.

Drawing power is worked out each month from the stock statement you file. The bank adds your paid-for stock and your eligible book debts. It subtracts your trade creditors. Then it takes off a margin, because the bank will not fund the whole asset.

Two things shrink it fast. Old receivables get excluded once they cross the age the bank allows, often 90 days. Stock you have not yet paid for is not yours to pledge, so creditors come off the top. A business with a ₹50,00,000 limit and slow-paying customers can find its drawing power at half that.

File the stock statement late and the bank can freeze the account or charge a penal rate. Diarise it.

Cash credit, overdraft or a term loan: which do I need?

A cash credit account is secured on your stock and receivables. It is meant for the working capital cycle, and drawing power moves with your assets. Interest is charged only on the daily outstanding balance.

An overdraft is usually secured on something else. A property, a fixed deposit, or nothing at all if the bank is comfortable. There is no stock statement and no drawing power calculation. That makes it simpler and normally dearer.

A term loan is for an asset with a life. Machinery, a vehicle, a fit-out. Using a cash credit limit to buy a machine is the classic mistake. The asset lasts seven years, the limit is renewed annually, and one bad renewal leaves you funding a long asset with money that just went away. If you are buying equipment, take an equipment loan instead.

Compare the pricing on our business loan interest rates page before you sign anything, and read the overdraft and credit lines explainer if you are choosing between the two structures.

Do I need collateral for a working capital loan?

Not below ₹20 lakh, if you are a micro or small enterprise. The RBI’s Master Direction on MSME lending, as updated on 9 February 2026, mandates that banks do not take collateral on loans up to ₹20 lakh to MSE units. The limit was ₹10 lakh before. The new figure applies to loans sanctioned or renewed on or after 1 April 2026. A bank may go up to ₹25 lakh where your track record supports it.

Above that, the CGTMSE guarantee is the route. It covers credit facilities up to ₹10 crore and pays the lender 75–90% of the amount in default. You pay a guarantee fee and an annual service fee for it. Our CGTMSE guide covers the fee structure.

Here is the uncomfortable part. Banks are allowed to lend without collateral. They are not obliged to lend at all. Many branches still ask for a property, and the legal answer is that they cannot insist on it below the threshold. Ask for the refusal in writing and quote the Master Direction. That conversation usually ends differently.

What does a cash credit limit actually cost?

Interest is the smallest part of the answer. You also pay a processing fee at sanction and again at every annual renewal. Add 18% GST to both. There is a stock audit charge on larger limits, a charge for creating and registering the charge with the registry, and often an unused-limit commitment fee.

The commitment fee is the one that catches people. Take a ₹1 crore limit and use ₹30 lakh of it, and some lenders bill you on the idle ₹70 lakh. Size the limit to what you will actually draw.

Penal charges apply if the account stays overdrawn, if the stock statement is late, or if drawing power falls below your outstanding. None of these appear in the headline rate. Ask for the full schedule of charges before you accept the sanction letter.