Inventory days
How long stock sits before it sells. Fast-moving, non-obsolete stock funds easily; aged or slow lines depress your drawing power and worry the committee.
Thin margins, high churn — funded right.
Working Capital & LC for Trading & Distribution Businesses
A trader doesn’t live on assets — you live on the cycle: stock in, debtors out, creditors paid. We size a cash credit (CC/OD) limit to your turnover, add a letter of credit limit so you can buy on your bank’s credit, and build the file your credit committee actually reads — lender-agnostic across PSU banks, private banks and NBFCs, and walked through to disbursement. Part of Finnova’s ₹4,250 Cr+ mobilised across 100+ corporate-finance mandates since 2011.
Turnover / Nayak method CC + LC structured together Lender-agnostic
Finnova’s corporate-finance track record since 2011, in numbers
₹4,250 Cr+
Capital mobilised across sectors20%
Of turnover — the Nayak limit yardstickCC + LC
Fund & non-fund limits, one sanctionPSU · Pvt · NBFC
Lender-agnostic limit placementSince 2011
CA / ex-banker, senior on every fileWorking capital for a trading business is the funding that bridges the gap between paying for stock and collecting from customers. Because a distributor holds little fixed-asset security, banks size the limit to turnover — under the Nayak (turnover) method, the working-capital limit is taken at 20% of projected annual turnover with a 5% borrower margin, assuming roughly a three-month cycle. The core facility is a cash credit (CC/OD) limit against stock and book debts, usually paired with a letter of credit (LC) limit to buy goods on credit. See the full corporate finance & debt syndication practice, or the CMA report & working-capital limit guide.
Finnova Advisory is an advisory firm — we structure the file, the limit and the terms; the bank sanctions and disburses. Methods, margins and drawing-power norms follow RBI guidance and each bank’s credit policy, applied case by case.
What actually gets funded
A trader is funded on the working-capital cycle — not on assets
Your file is read on one number: how many days your money is tied up. Debtor days plus inventory days, minus the credit your suppliers give you.
Debtor days
How long customers take to pay. Clean, diversified, current debtors are prime security; stretched ageing eats into eligible book debts and your usable limit.
Creditor days
The credit your suppliers extend you — it shortens the cycle and reduces the funding you need. An LC can stretch this legitimately, deferring payment by 60–90 days.
The net cycle
Inventory days + debtor days − creditor days = the gap you fund. Shorten any leg and you need less limit; the Nayak 20% assumes about a 3-month cycle.
Want to shrink the gap before you ask for more limit? Read how to calculate and shorten your working-capital cycle — every day you take out of the cycle is a rupee you don’t have to borrow.
How the limit is sized
Nayak vs Tandon — the methods that size a trading limit
Smaller trading limits run on the turnover (Nayak) method; larger ones move to Tandon-style MPBF or a cash budget. Knowing which a bank will apply — and pre-empting it — is half the battle.
| Method | How the limit is computed | Best fit | What to know |
|---|---|---|---|
| MethodNayak / Turnover method | ComputationLimit = 20% of projected annual turnover; borrower brings 5% margin | Best fitSmaller trading limits (broadly up to ~₹5 Cr, ~₹7.5 Cr for MSME) | NoteAssumes ~3-month working-capital cycle; simplest and most common for distributors |
| MethodTandon Method I (MPBF) | ComputationBank funds 75% of the working-capital gap; borrower funds 25% of the gap | Best fitMid-size trading limits where a fuller assessment is required | NoteWorking-capital gap = current assets − other current liabilities |
| MethodTandon Method II (MPBF) | ComputationBorrower funds 25% of total current assets (≈1.33:1 current ratio) | Best fitLarger limits; banks’ preferred discipline for sizeable exposures | NotePushes a stronger liquidity position than Method I |
| MethodCash-budget method | ComputationLimit set to the peak cash deficit in a month-by-month cash budget | Best fitSeasonal traders — festive, agri-input, school-season stock builds | NoteBest where turnover is lumpy and a flat 20% would mis-size the limit |
Rule of thumb for a distributor: under Nayak, ₹20 Cr of projected turnover supports roughly a ₹4 Cr working-capital limit (20%), with you bringing ~₹1 Cr margin (5%). Cross that band and the bank will likely apply Tandon Method II — funding only the gap above 25% of current assets, which is why a healthy current ratio (~1.33:1) matters. We model both before you walk in, so the limit you ask for is the limit they can give.
The facility mix
CC for the stock, LC for the purchase — structured together
A trading sanction is rarely one limit. It’s a fund-based CC/OD for what you hold, plus a non-fund-based LC for what you buy on credit — sized against the same cycle.
| Facility | Type | What it does for a trader | How it’s drawn |
|---|---|---|---|
| FacilityCash Credit (CC) | TypeFund-based | What it doesRevolving limit against stock and book debts; funds day-to-day purchases | DrawnDrawn up to drawing power, recomputed monthly from your stock/debtors statement |
| FacilityOverdraft (OD) | TypeFund-based | What it doesFlexible drawing on the current account; sometimes against property/FD as collateral | DrawnUseful as a buffer alongside CC for short, sharp cash gaps |
| FacilityLetter of Credit (LC) | TypeNon-fund-based | What it doesPays your supplier on compliant documents; usance LC defers your payment | DrawnConsumes the LC (NFB) sub-limit, not the CC; devolves onto CC only if unpaid at maturity |
| FacilityBuyer’s / Supplier’s credit | TypeNon-fund-based-linked | What it doesShort-term import finance arranged against an LC to fund overseas purchases | DrawnLets a trader buy abroad on credit terms and repay after the goods are sold |
The point of structuring CC and LC together: an LC that defers your supplier payment by 60–90 days carries the stock that would otherwise sit on your CC at interest. Buy on LC where suppliers accept it, keep the CC for cash buys and receivables — and you run a leaner, cheaper limit. LCs are governed by UCP 600 (banks examine documents within a maximum of five banking days); in India, RBI/FEMA override UCP 600 on any conflict. An LC is a payment instrument — it pays on compliant documents, unlike a bank guarantee, which pays on default.
The number that moves every month
How drawing power moves with your stock and debtors
Your sanctioned limit is fixed; your drawing power is not. It’s recomputed each month from the stock-and-receivables statement you submit — and you can draw only up to the lower of DP and the sanctioned limit.
The drawing-power formula
Let stock age past the eligible window or debtors stretch beyond the agreed days, and DP falls — even though your sanction hasn’t changed. Disciplined monthly statements keep the limit you fought for actually usable.
What erodes a trader’s DP
- Aged stock beyond the eligible period is dropped from the DP base.
- Debtors over the agreed ageing (often 90 days) become ineligible book debts.
- Rising creditors are deducted — useful, but they directly cut DP.
- Late or sloppy statements can freeze drawings until the position is verified.
Deep dive: drawing power calculation, explained.
The trader’s case to a credit committee
How we turn a thin-margin file into a sanction
A trading file has no factory to fall back on, so it’s won on the quality of the cycle and the book. Here’s how we build it.
-
Map the cycle & size the limit
week 1We compute your debtor, inventory and creditor days, decide whether Nayak or Tandon applies, and size the CC and LC limits to the real gap — not a round number that gets cut at committee.
-
Clean the book, build the CMA
case-dependentWe tighten debtor ageing and stock classification so eligible security is maximised, then build the CMA-backed projection the committee reads — turnover, margins, cycle and DP all reconciling.
-
Place it with the right lender
3–6 weeksPSU bank, private bank or NBFC — we take the file to the lender whose appetite and pricing fit a trading profile, and run the 5 Cs (Character, Capacity, Capital, Collateral, Conditions) on your behalf.
-
Disbursement & DP discipline
ongoingWe see the sanction through to disbursement, then set up the monthly stock-and-debtors statement routine so your drawing power stays high and the limit stays fully usable.
Why Finnova for a trading limit
We sit on your side of the credit committee
A bank sells you its limit on its terms; we structure the file so a thin-margin, high-churn trading business gets the limit it actually needs — and keeps it usable.
01
Sized to your cycle, not a template
Nayak or Tandon, CC plus LC — modelled on your real debtor, inventory and creditor days before you walk in.
02
CC and LC built together
An LC that defers supplier payment carries stock your CC would otherwise fund at interest — so you run a leaner limit.
03
Lender-agnostic placement
PSU bank, private bank or NBFC — placed with the lender whose appetite fits a trading profile, not whoever we’re tied to.
04
Drawing power kept high
We set up the monthly statement discipline so aged stock and stretched debtors don’t quietly shrink your usable limit.
Consultation
Tell us your turnover — we’ll size the limit
Share your turnover, your buying terms and your debtor and stock days, and we’ll tell you the right CC and LC limits, which method a bank will apply, and what your file needs before it goes to committee. A straight read from people who run trading mandates every week.
Thank you — your enquiry has been submitted
We’ve received your details. A senior member of our team will review them and get back to you within one business day. Everything you’ve shared stays strictly confidential.
FAQ
Working capital for traders, answered
For smaller limits, banks use the turnover (Nayak) method: the working-capital limit is taken at 20% of projected annual turnover, with the borrower contributing a 5% margin. For larger trading exposures banks move to the Tandon-style MPBF or cash-budget methods. A trader’s file is judged largely on turnover and the working-capital cycle — debtor days plus inventory days minus creditor days — because a distributor holds little fixed-asset security.
The core is a cash credit (CC) or overdraft (OD) limit to fund stock and receivables, plus a letter of credit (LC) limit to buy goods on credit terms — inland or import. A trader on thin margins and high churn lives on the CC for day-to-day purchases and the LC to push payment dates out. We structure the CC and LC together so the fund-based and non-fund-based limits match your actual buying and collection cycle.
Drawing power (DP) is recomputed every month from your stock-and-receivables statement: DP = (eligible stock − margin) + (eligible book debts − margin) − creditors. Your usable limit moves with it. Critically, drawing power is not the sanctioned limit — you can draw only up to the lower of the two. A trader who lets stock age or debtors stretch will see DP fall even with the sanction unchanged.
A trading or distribution business carries little plant or property to pledge — its assets are stock and receivables that turn over constantly. So banks size the limit to the flow of business (turnover) rather than a stock of fixed assets. The Nayak/turnover method exists precisely for this: 20% of projected turnover as the limit, 5% as your margin, which assumes roughly a three-month working-capital cycle.
An LC lets you buy stock on the strength of your bank’s credit rather than paying cash upfront. A usance LC defers payment to your supplier (say 60–90 days), giving you time to sell the goods and collect before the LC matures — directly shortening the cash gap. LCs are governed by UCP 600, under which the bank examines documents within a maximum of five banking days and pays on compliant documents. In India, RBI/FEMA rules override UCP 600 on any conflict.
It rests on the working-capital cycle and the quality of the book: clean, diversified debtors with controlled ageing; fast-moving, non-obsolete stock; and a turnover that supports the limit asked for. The committee reads the 5 Cs — Character, Capacity, Capital, Collateral, Conditions — and a CMA-backed projection. A tight cycle and disciplined DP statements are what convert a thin-margin trading file into a sanction.
Most traders need both, but the mix depends on how you buy. If you buy largely on cash or short credit, a larger CC funds the stock directly. If your suppliers accept LC terms, an LC limit lets you defer payment and run a leaner CC. We structure the two together against your debtor, inventory and creditor days so you are neither paying CC interest on stock an LC could have carried, nor short of funds at peak season.