Supplier Credit Cut? Recalculate Your Working Capital Need

When a supplier shortens your credit from 60 days to 15, or asks for advance payment, you need more working capital for exactly the same sales. The extra amount is roughly your daily purchases multiplied by the days of credit you lost. For a business buying ₹50,000 of goods a day, a 45-day cut means about ₹22.5 lakh of extra funding, part of which your bank may finance and part of which must come from your own margin.

This guide shows how to recalculate the requirement, how it affects drawing power, and how to approach your bank. All figures are illustrative.

Why the gap grows

Your working capital gap is the money tied up between paying for goods and collecting cash from customers:

Working capital gap = Inventory + Receivables − Trade payables

Supplier credit (trade payables) is free financing. When suppliers cut it, nothing else changes in the business, yet the gap widens. Suppliers usually tighten terms because of their own cash pressure, a credit insurer reducing your limit, raw-material price swings, or your past late payments. Ask which reason applies, because the fix differs.

Worked example: recalculating the requirement

Mehta Traders, illustrative figures, using a 360-day year for easy maths:

• Sales: ₹2.16 crore a year, or ₹60,000 a day
• Purchases (cost of goods): ₹1.8 crore a year, or ₹50,000 a day
• Inventory holding: 45 days of purchases
• Customer credit: 60 days of sales
• Supplier credit: was 60 days, now cut to 15 days

The gap rises by ₹22.5 lakh, exactly ₹50,000 × 45 days lost. Of that, the bank could finance up to ₹16.875 lakh at a 25% margin if it agrees, and Mehta Traders needs ₹5.625 lakh more of its own money.

The drawing power effect

Most banks calculate drawing power as (stock + eligible receivables − trade creditors) × (1 − margin). Lower creditors therefore raise drawing power, from ₹21.375 lakh to ₹38.25 lakh in this example. But if the sanctioned cash credit limit is ₹25 lakh, Mehta Traders can draw only ₹25 lakh. The remaining ₹13.25 lakh needs a limit enhancement, and the extra margin money needs its own funds. Drawing power basics are explained in working capital loan vs term loan.

Cross-check with the turnover method

For micro and small enterprises with fund-based working capital limits up to ₹5 crore, RBI's MSME guidance says banks should assess the requirement at a minimum of 20% of projected annual turnover, with the borrower bringing about 5% as margin. For Mehta Traders, 20% of ₹2.16 crore is ₹43.2 lakh, higher than the ₹38.25 lakh from the gap method. Ask your bank which method it used for your limit, and use the higher figure as a talking point if your projections support it.

Step-by-step: what to do in the first two weeks

1. Get the new terms in writing. An email or letter from the supplier stating the new credit days or advance requirement is the most useful document you can give a bank.
2. Recalculate the gap for the next 12 months using the table above with your own numbers, and for your peak month separately.
3. Check your limit and drawing power in the latest stock statement. Note how much headroom you actually have.
4. Negotiate with the supplier. Options: a phased cut (60 to 45 to 30 days), credit for regular items with advance only for special orders, a supplier credit limit backed by a bank guarantee or letter of credit, or a cash discount for early payment.
5. Tighten your own cycle. Cut slow-moving inventory and chase receivables; every day saved reduces the gap. See the cash conversion cycle.
6. Approach your bank for a mid-term review or temporary additional limit (below).
7. Bring in owner's funds for the margin portion if needed, and record it properly as capital or unsecured loan from the promoter.

Should you take the early payment discount?

If a supplier offers 2% off for paying in 15 days instead of 60, the annualised value is:

2% ÷ 98% × 360 ÷ 45 = about 16.3% a year (about 16.6% on a 365-day year)

If your cash credit costs an illustrative 10-11%, paying early from the limit earns more than it costs. Our guide on the cost of 30-day credit terms has the full method.

Asking your bank for more working capital

RBI's Master Direction on lending to the MSME sector provides for a mid-term review of regular working capital limits when demand changes, and for additional working capital to meet emergent needs of MSE units. How much the bank gives is its credit decision, so prepare well:

Documents to submit:

• Supplier letters or emails showing the new terms
• Revised working capital calculation (the table above) and projected CMA data for the year
• Last six to 12 monthly stock statements and receivables ageing
• Creditors ageing showing you pay on time
• GST returns (GSTR-1 and GSTR-3B) and GSTR-2B purchase data
• Bank statements and latest audited or provisional financials

Questions to ask the bank:

• Can you consider an ad hoc or temporary limit while the regular limit is reviewed, and for how long?
• What margin will apply to the enhanced limit?
• Will the enhancement need extra collateral, or can it stay within collateral-free norms? As of October 2026, banks are directed not to take collateral for loans up to ₹20 lakh to micro and small enterprises; a CGTMSE guarantee can cover larger amounts.
• What processing or renewal charges apply?
• What is the expected timeline for a decision?

If your outstanding goes above drawing power while you wait, ask the branch in writing how to regularise it. A cash credit account whose balance stays above the limit or drawing power continuously for 90 days is treated as out of order and can become a non-performing asset.

If you are buying from micro or small suppliers

A supplier registered as a micro or small enterprise is entitled to payment within the agreed period, which cannot exceed 45 days from acceptance. Late payment carries compound interest at three times the RBI bank rate, and the delayed amount is deductible for you only when paid, under Section 37(2)(g) of the Income-tax Act, 2025 (old Section 43B(h)). Paying such suppliers late to stretch your own cash is costly.

Common mistakes

• Using the cash credit limit to pay for machinery while suppliers squeeze you; long-term assets need a term loan.
• Assuming the bank will fund 100% of the new gap; you still need margin money.
• Waiting until cheques bounce before telling the bank. Early disclosure gets more sympathy.
• Over-ordering to get volume discounts when credit is tight, which adds to inventory days.
• Not checking why the supplier cut credit. If it is your payment record, fixing that may restore terms.

Escalation if the bank does not respond

If your enhancement request is not acknowledged or decided within a reasonable time, or you are charged fees outside the bank's schedule, write to the branch head and then the bank's grievance cell. If there is no reply within 30 days, or you are not satisfied, file on cms.rbi.org.in under the Reserve Bank – Integrated Ombudsman Scheme, 2026 within 90 days. The Ombudsman looks at deficiency in service, such as unexplained delay or wrong charges, not at the bank's commercial judgment on how much limit to sanction. For delayed payments from your own MSE customers, the route is the MSME ODR portal (odr.msme.gov.in), which replaced MSME Samadhaan for new cases from 15 October 2025.

Key takeaways

• Extra funding needed ≈ daily purchases × days of supplier credit lost.
• In the example, a cut from 60 to 15 days raises the gap from ₹28.5 lakh to ₹51 lakh, needing ₹5.625 lakh more of own margin.
• Lower creditors raise drawing power, but only up to your sanctioned limit.
• Ask the bank for a mid-term review or additional limit with supplier letters and a revised calculation.
• Negotiate phased terms with suppliers and tighten your own inventory and collection days.