Drawing Power, Headroom and a Peak-Season Order
Meera runs a job-work stitching unit in Ichalkaranji supplying school uniforms to a Tirupur buyer. She has a ₹10 lakh cash-credit limit sanctioned against 70% of paid stock and 50% of book debts below 90 days. On 1 March her stock is valued at ₹6 lakh, debtors are ₹9 lakh of which ₹1.5 lakh is over 90 days, and the outstanding balance is ₹5.4 lakh. She has just won an order worth ₹18 lakh requiring ₹9 lakh of fabric (her supplier allows 30 days' credit) and ₹3.5 lakh of wages and overheads paid across 60 days; the buyer pays at 60 days against a clean bill. Her regular work continues alongside. The bank will not raise the limit before the August review, and a local financier has offered invoice discounting at 18% a year plus a 2% processing fee.
1. Compute the drawing power, the headroom and the peak funding gap for the new order.
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Drawing power (DP):
- Stock: 70% × ₹6,00,000 = ₹4,20,000
- Eligible debtors: (₹9,00,000 − ₹1,50,000 over 90 days) = ₹7,50,000 × 50% = ₹3,75,000
- Total DP = ₹7,95,000, which is below the sanctioned ₹10 lakh, so the limit is not the binding constraint - the DP is.
- Outstanding ₹5,40,000, so available headroom = ₹2,55,000.
Peak gap on the new order:
- Fabric ₹9,00,000 must be paid around day 30; wages/overheads build to about ₹1,75,000 by day 30 and ₹3,50,000 by day 60.
- Cash out by roughly day 30–45: ₹9,00,000 + ₹1,75,000 ≈ ₹10,75,000. Receipt of ₹18,00,000 comes only on day 60.
- Against this she can deploy ₹2,55,000 of headroom, leaving a peak requirement of roughly ₹8.2 lakh.
Read the result carefully: the order is profitable, but it is a working-capital mismatch, not a demand problem. Because the supplier's 30-day credit expires a month before the buyer pays, she finances the entire fabric cost from her own resources for that month. Executing the order without new funding would push the CC account over its DP - a limit violation, not just an inconvenience, and a fast route to the account being frozen at the August review.
2. Evaluate her funding options and recommend a package, taking into account the existing charge over debtors.
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The critical legal point first: the debtors are already hypothecated to the bank. Discounting those same invoices with the local financier without the bank's written consent creates a double charge on the same receivables - the financier's charge will not be registered, the buyer will get two payment directions, and the bank can treat it as concealment. Any invoice discounting must run only on new invoices under a tripartite arrangement the bank has approved.
Option-by-option:
- Invoice discounting at 18% + 2% processing: all-in cost is roughly 20–21% a year. On ₹8 lakh for about 60 days the interest-plus-fee works out to roughly ₹27,000–₹30,000 - unattractive per rupee, but trivial against the contribution on an ₹18 lakh order. Use it only for the bridge, only if the bank consents, and only on unpaid invoices not already charged.
- CC limit enhancement / ad hoc limit: cheapest at 10–11%, but unavailable before August - exactly when the cash is needed. Ask anyway for a temporary ad hoc limit backed by the confirmed order copy; many branches can sanction this within delegated powers.
- TReDS: viable only if the Tirupur buyer is onboarded (mandated for large corporates). She should ask; if yes, discounting becomes competitive and transparent.
- MSMED Act leverage: with Udyam registration she can insist on payment within 45 days, and delayed payment attracts compound interest at three times the RBI bank rate. Worth using as negotiation, not as a first move against a repeat buyer.
- Supplier negotiation: asking for 45–60 days instead of 30 removes most of the gap at zero interest cost.
Recommended package: get the ad hoc limit request in writing with the order copy, simultaneously renegotiate supplier credit to 45 days, and use consented bill discounting for whatever gap remains (roughly ₹3–4 lakh for 60 days). Do not fund the whole ₹8 lakh at 20% when half of it is a telephone call to the supplier.
3. What must she fix before the August review so that this does not recur?
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Convert a one-off crisis into a structural fix:
- Ageing discipline: the ₹1.5 lakh of debtors over 90 days is dead weight - it earns no DP and signals weak follow-up. Chasing it converts receivables into drawing power immediately, more cheaply than any financier.
- Working-capital cycle design: match credit terms. If buyers get 60 days, suppliers and job workers must get 45–60 days; the business must not finance the gap on every order.
- Limit sizing: present the bank with a projected DP statement for the peak season (stock build, order book, receivable cycle) and ask for a limit sized on peak, not average, requirement. A ₹10 lakh limit against a ₹7.95 lakh DP is already evidence the limit and the drawing power are not aligned.
- MSMED compliance: keep Udyam current and put the 45-day payment term into purchase orders; file on MSME Samadhaan only after a documented demand, not as a first step.
- Records: a simple ageing register, stock statement by the 5th of each month, and separate order-wise costing so that future orders can be accepted or refused on the basis of the funding gap, not just the margin.