How Much of That Credit Line Can You Actually Use?

A typical situation looks like this. A distributor’s owner wants to approve a supplier order before lunch. Her advisor has the cash forecast open, and it shows the business will need another $35,000 during the next few weeks.

The owner points to the bank statement. “We’ve got seventy thousand left on the line. Go ahead.”

The statement shows a $200,000 credit limit and a $130,000 balance. Subtracting one from the other leaves $70,000, so the purchase seems covered. The owner expects to borrow, pay the supplier, and repay the line as customers send their checks.

Her advisor asks for the latest receivables report and the lender’s calculation of available credit. Some invoices are getting old. Depending on the agreement, those invoices may stop supporting new borrowing before the customer pays them.

For this hypothetical business, the decision is whether the line can fund the purchase on the day the money is needed. The advisor has to check more than the balance. Approving the order now creates a payment obligation, even if the bank later declines the draw.

A steady rate doesn’t settle this purchase

The Federal Reserve’s October 28 statement kept the federal funds target range at 3.75% to 4%. The decision passed by a 10-2 vote; the two dissenting voters preferred an increase of a quarter percentage point.

Owners may read the unchanged rate as a little breathing room. For an advisor, the missing question is whether the client can still access the amount the forecast requires. A policy announcement doesn’t confirm a lender’s approval of a particular draw.

The statement doesn’t establish that banks have tightened business credit, and it doesn’t tell us this distributor’s borrowing rate. Those are separate facts to verify. Its useful prompt is to check the financing assumptions already sitting in the cash plan.

Start by separating the credit limit from the amount currently available. Some lines allow borrowing against eligible receivables or inventory, subject to the agreement. The lender may call the calculation a borrowing base, and it can change while the stated credit limit stays the same.

Other lines work differently. Read this client’s documents before applying a formula. Ask the lender to confirm any unclear condition through the owner’s normal banking process.

Check the invoices behind the available amount

Return to the distributor. Assume its agreement allows borrowing up to 80% of eligible receivables, capped at $200,000. For this example, there are no other reserves or restrictions, and the company owes $130,000.

With $225,000 of eligible receivables, the borrowing base is $180,000. Subtract the outstanding balance, and current availability is $50,000. The statement’s apparent $70,000 cushion has already overstated what the owner can draw.

Now suppose $50,000 of invoices will become ineligible before the purchase payment is due. The customers haven’t paid, and the remaining eligible receivables fall to $175,000. At the same advance rate, the borrowing base drops to $140,000, leaving only $10,000 available against the unchanged debt.

The forecast needs $35,000. The line can supply $10,000 under these assumptions, leaving $25,000 unresolved. A $200,000 limit won’t close that gap.

These amounts illustrate the decision; they aren’t findings from the Fed statement or a lender’s offer. Real agreements may exclude disputed invoices, limit customer concentrations, or apply other adjustments. Use the actual eligibility rules and the lender’s confirmed calculation.

Ask which invoices will lose eligibility before the next draw. An aging report becomes much more useful when the advisor connects it to the purchase date.

Put borrowing capacity beside the cash forecast

Build the operating case before adding financing. The 13-week cash forecast should show customer receipts on supported collection dates and supplier payments when due. Include interest and fees, and retain the owner’s chosen operating reserve.

In this example, assume that work produces the $35,000 financing need. It already accounts for ordinary costs and the required reserve. Don’t add those items again when comparing the draw with available credit.

Beside the cash schedule, track eligible receivables and the debt balance for each draw date. Carry borrowing capacity forward using expected invoice aging, new eligible billings, collections and repayments. Have the lender confirm the mechanics before relying on them.

Pay attention to what happens when a customer pays. A receipt may reduce eligible collateral, and a lender may sweep the deposit against the line. That same receipt can’t remain in checking as spendable cash if it has already repaid debt.

Reconcile those movements so the model doesn’t count the customer’s money twice. Show the receipt, any required repayment, and the resulting capacity to borrow again. The agreement determines whether and when that capacity is available.

Then test a specific late payment. Move its collection date and recalculate eligibility as well as cash. A delayed invoice may hurt both sides of the plan: less money arrives, and less credit remains available to cover the delay.

Resolve the gap before approving the order

For the opening purchase, borrowing the full $35,000 would raise debt to $165,000. Against the assumed $140,000 borrowing base, that request exceeds capacity by $25,000. Leave the unsupported portion out of the committed forecast.

The next action depends on what created the gap. An invoice dispute needs a different conversation from a customer who has simply missed the payment run. Review the collection evidence before promising that a phone call will release enough cash.

The owner could ask about splitting the supplier order or changing the payment date. A lender might consider revised terms. Treat either possibility as a separate case until the other party agrees, then rerun both the cash and borrowing calculations.

This is Clear Path To Cash work: identify the funding issue, trace its cause, compare feasible actions, and model the cash impact before helping the owner decide. Record who will verify the missing information and when the commitment must be made.

The distributor may still place the order, but the advisor first needs support for the missing $25,000 or a smaller commitment. Unused credit becomes useful only when the business can draw it when needed.

Clear Path To Cash Advisor helps advisors apply this discipline, with Advisor Membership providing training and support for the client conversation. The system organizes the work; the advisor checks the assumptions and helps the owner weigh the commitment.