How to Calculate Drawing Power: Best Practices for Fast-Growing SMEs

In India’s fast-growing SME sector, efficient working capital management determines how quickly a business can scale.

According to the Reserve Bank of India (RBI), MSME credit grew over 20% year-on-year in FY 2024, showing how vital short-term funding is for business expansion.

For founders and financial managers, learning how to calculate drawing power accurately is important to look out for this capital and maintain liquidity.

This article explains drawing power, its formula, and the best practices for drawing power calculation that help SMEs grow without cash-flow disruptions.

What is Drawing Power and Why It Matters for SMEs?

Drawing Power (DP) represents the maximum amount a lender allows you to borrow based on your current assets, mainly stock and receivables, after deducting liabilities and a margin.

Tracking DP gives you a clear picture of how much financing your assets can support and helps you plan operations efficiently.

Here’s why every SME should pay close attention to it:

• Ensures steady cash flow: Accurate drawing power helps you maintain smooth day-to-day operations by ensuring you always have enough liquidity for purchases, payroll, and immediate expenses.
• Prevents over-borrowing: By keeping your borrowing limit tied to actual asset values, you avoid taking on excessive debt or paying unnecessary interest on idle funds.
• Builds lender confidence: A transparent and updated DP record demonstrates financial reliability, helping you negotiate better terms and access higher credit limits when needed.
• Safeguards business continuity: During demand dips or supply chain delays, maintaining the right drawing power ensures uninterrupted operations and shields your business from liquidity crunches.
• Supports long-term expansion: With a clear understanding of your DP capacity, you can plan investments, manage seasonal spikes, and pursue growth opportunities backed by measurable financial data.

How to Calculate Drawing Power?

To calculate DP correctly, you need accurate financial data and a clear understanding of each component.

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The standard drawing power formula is: DP = (Stock + Book Debts – Creditors) – Margin

Here’s how each component contributes:

• Stock: Total value of raw materials, work-in-progress, and finished goods available for sale.
• Book Debts: Amounts receivable from customers for goods or services already delivered.
• Creditors: Dues owed to suppliers or vendors for purchases made on credit.
• Margin: A percentage retained by the lender to cover potential risks such as bad debts or asset devaluation.

Example:

Suppose your SME holds ₹60 lakh in stock, ₹40 lakh in book debts, and owes ₹15 lakh to creditors. If the bank/lender applies a 25% margin, then:

DP = (60 + 40 – 15) – 25% of (60 + 40 – 15)

DP = ₹85 lakh – ₹21.25 lakh

DP = ₹63.75 lakh

It means you can borrow up to ₹63.75 lakh against your eligible assets.

5 Best Practices for Drawing Power Calculation

Accurate drawing power management isn’t just about meeting bank requirements; it’s about keeping your working capital aligned with real business performance. When done right, it helps SMEs avoid liquidity traps, reduce financing costs, and build stronger lender trust.

Here are the 5 best practices for drawing power calculation that every growing SME should follow:

1. Maintain real-time inventory valuation

Your inventory value directly influences your drawing power. Relying on outdated or estimated stock data can inflate your DP, leading to excess borrowing or future shortfalls. Use automated tools to record stock movement daily and maintain transparency.

2. Reconcile receivables regularly

Book debts must represent what’s actually recoverable, not just what’s billed. Overdue or doubtful debts weaken your financial credibility and distort your DP figure. Review your receivables weekly and eliminate overdue or doubtful debts before DP submission.

3. Keep creditor records up to date

Supplier payments and credit terms directly affect the liabilities side of your DP equation. Delayed updates can make your financials appear stronger than they are, leading to inaccurate limits. Keep accounts payable updated to show a true financial position.

4. Apply lender-specific margin percentages correctly

Each lender defines its own margin requirements, typically between 20–30% to cover potential asset devaluation or default risk. Misapplying this margin can overstate your borrowing capacity. Always confirm the applicable margin with your lender before calculation. You can also track margins using a DP worksheet.

5. Conduct monthly DP reviews with your finance team

Drawing power isn’t static; it fluctuates with sales, purchases, and payment cycles. Reviewing it only during audits or renewals limits visibility. Frequent reviews let you identify discrepancies early and adjust your funding strategy proactively.

Final Words

Understanding how to calculate drawing power is not just about formulas; it’s about financial clarity and strategic control.

For fast-growing SMEs, understanding this concept ensures smoother cash flow, quicker loan approvals, and stronger credibility with financial partners.

Platforms like Recur Club qualify businesses to use their revenue data to access non-dilutive growth capital instantly without traditional collateral or long approval cycles.

By aligning accurate drawing power calculations with smarter financing, you can scale faster, maintain liquidity, and achieve sustainable growth.