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Drawing Power Formula:
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Drawing Power (DP) is the maximum amount that can be withdrawn from a working capital loan facility. It represents the borrowing capacity based on current assets after deducting current liabilities and applying the lender's margin.
The calculator uses the Drawing Power formula:
Where:
Explanation: The formula calculates the available borrowing capacity by taking the net working capital (current assets minus current liabilities) and applying the lender's conservative margin of 75% to account for risk.
Details: Accurate Drawing Power calculation is crucial for managing working capital loans, ensuring businesses don't over-borrow while maintaining adequate liquidity for operations.
Tips: Enter current assets and current liabilities in your local currency. Both values must be non-negative. The calculator will automatically apply the 75% lender margin.
Q1: What constitutes Current Assets in this calculation?
A: Current Assets primarily include receivables and inventory that can be quickly converted to cash within one year.
Q2: Why is there a 75% margin applied?
A: The 75% margin is a conservative approach by lenders to account for potential fluctuations in asset values and provide a safety buffer.
Q3: How often should Drawing Power be calculated?
A: Drawing Power should be calculated monthly or quarterly, depending on the loan agreement terms and business volatility.
Q4: Can the margin percentage vary between lenders?
A: Yes, while 75% is common, different lenders may apply margins ranging from 70% to 85% based on their risk assessment.
Q5: What happens if Current Liabilities exceed Current Assets?
A: If Current Liabilities are greater than Current Assets, the Drawing Power becomes zero or negative, indicating no borrowing capacity under this facility.