Project Finance · Question

Should I use internal accruals before approaching a lender for my expansion?

Short answer

Use some internal accruals, but rarely all of them. Lenders expect the promoter to fund a meaningful share from own resources, so some use is almost always required. Committing every rupee of surplus, however, leaves the business exposed to a sales dip or a delay, so the usual advice is to keep a liquidity buffer and borrow for the balance.

In more detail

Accruals are profits the business has retained and not distributed. They are the lowest-cost money you have, since they carry no interest, and they signal commitment to a lender. The question is how much to commit.

Reasons to use them are plain. Lenders ask for a promoter share in the means of finance, and accruals are the natural source. A smaller loan means lighter instalments and better repayment cover, and no lender covenants or security attach to your own funds.

Reasons for restraint are just as real. The existing business still needs working capital, and draining surplus can force expensive short-term borrowing later. Expansions run late and over budget more often than owners expect, and your buffer absorbs the gap. Spending all internal money leaves nothing for statutory dues, repairs or a slow season. Borrowing for a good project also builds a repayment record that eases future credit.

A balanced approach is to set the contribution at the level the lender wants, then test what the business looks like if the expansion starts late and sales dip for a while. If it can still pay its dues from the remaining liquidity, the plan is sensible. If it cannot, consider a smaller phase or a larger loan.

A food processor with large retained surplus

A processor holds a good surplus and wants to add a second line. Using it all would meet the promoter share and avoid borrowing. But a slow monsoon month in another business line would then leave no cushion. The promoter instead puts in the lender's required share, keeps a reserve for operations, and borrows the rest over a measured tenure.

Distinguish accruals sitting in bank deposits from those already tied up in stock or loans to others; only the first is readily available.

Key points

Accruals are interest-free and show commitment, so some use is expected by lenders.
Using all surplus risks a liquidity crunch if the project is late or sales dip.
Keep a buffer for working capital, dues and overruns.
Test your plan with a delayed start and softer sales before deciding the split.
Count only accruals actually available as cash.

Who this applies to

Owners with surplus cash weighing how much to commit to expansion.
Promoters asked by a lender to show their own contribution.
Finance heads sizing the loan for a new line or unit.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority.