DP in loan typically refers to Drawing Power, a crucial concept for businesses that have borrowed funds from banks for working capital needs. It dictates how much of the sanctioned loan amount a borrower can actually access.
Understanding Drawing Power
Drawing Power (DP) isn't just a random limit; it's carefully calculated based on the borrower's current assets, primarily inventory and receivables. Here's a breakdown:
- Calculation Basis: DP is generally determined by the value of a company's current assets, like inventory.
- Purpose: It dictates the actual amount a borrower can withdraw from their sanctioned working capital loan.
- Relevance: Drawing Power is especially relevant in situations where businesses use their current assets as collateral for their working capital loans.
Factors Affecting Drawing Power
Several factors can influence a company's Drawing Power. Here are a few common ones:
- Inventory Levels: A decrease in inventory value reduces the drawing power, as the collateral's worth is diminished.
- Receivables: The amount owed to the business by its customers. Higher, healthier receivables usually mean a higher DP.
- Stock Audits/Statements: Banks conduct regular audits and rely on borrower-submitted stock statements to evaluate the value of current assets. Inaccuracies here can impact DP.
DP vs. Loan Amount
It's important to distinguish Drawing Power from the overall loan amount sanctioned:
| Feature | Drawing Power (DP) | Sanctioned Loan Amount |
|---|---|---|
| Definition | The maximum amount a borrower can withdraw currently. | The total loan amount approved by the bank. |
| Basis | Current asset value (e.g., Inventory, Receivables). | Creditworthiness, project viability, and collateral security. |
| Fluctuation | Varies based on changes in current asset value. | Generally fixed unless the loan terms are renegotiated. |
Example
Imagine a business has a sanctioned working capital loan of $500,000. However, based on their current inventory and receivables, the bank calculates their Drawing Power to be $300,000. This means that, at present, the business can only withdraw up to $300,000 from the sanctioned loan.
