Lines of credit requirements: how lenders set the limit

Lines of credit requirements differ by lender, but the checks behind them are consistent: how your cash cycle works, what collateral backs the limit, which receivables count, and what you must keep reporting. This guide covers how those checks set your limit and keep testing it, with the benchmarks bank examiners use. Entry thresholds such as credit score, revenue or time in business are each lender's own, so ask for them in writing; the one place they are published is the SBA-backed line, covered below.

A lender assessing a term loan asks whether you can repay a fixed amount over a fixed period. A lender assessing a revolving facility asks something different: whether your business runs a cycle that closes. Almost everything you will be asked for follows from that.

What to take away

Underwriting a cycle, not a purchase

A cycle is the loop between money going out and money coming back: buying or producing, selling, invoicing, and being paid. A facility funds the gap in the middle, so a lender wants to see that the loop actually closes and roughly how long it takes.

Receivables aging shows whether customers pay and when, while payables aging shows what you owe on the other side.

Inventory records show how long stock sits before it sells; bank statements show the real rhythm rather than the annual summary. Seasonality shows whether the gap is one gap a year or twelve small ones.

If you cannot describe your own cycle in a couple of sentences, that is the first piece of work, and it is worth doing before you speak to anyone. Start from your own numbers: how many days between paying for something and being paid for it, and how much that varies across a year.

Where a limit actually comes from

Two mechanisms, and they behave completely differently.

A fixed limit is set once, on the strength of the business, and stays where it is until it is reviewed. Simple to live with, and reviewed periodically.

A derived limit, often called a borrowing base, is recalculated from collateral you report on a regular cadence. The lender applies an advance rate to the eligible portion of your receivables, and sometimes inventory, and what you may draw is whatever that calculation produces at the time. The advance rate applied to each collateral category is the algebra a lines of credit calculator sets out.

The OCC handbook on asset-based lending gives the bank benchmarks. Common advance rates range from 70 percent to 85 percent of eligible accounts receivable, and some banks go up to 90 percent of eligible business-to-business receivables. On inventory, a bank typically advances up to 65 percent of the book value of eligible inventory, or 80 percent of its net orderly liquidation value. A single customer at 10 percent or more of the receivables portfolio counts as a concentration, and concentrated accounts should be limited to no more than 10 percent to 20 percent of the receivables borrowing base. Dilution is usually expected to be 5 percent or less of receivables.

The second kind is the one that surprises people. Your availability moves with your own reporting. A month where collections were strong and new invoicing was light can reduce what you can draw at exactly the moment you feel most comfortable. Ask which mechanism applies before you rely on a number.

What tends to be excluded from a derived limit

Not everything you are owed counts toward availability. The categories are consistent even though the specifics belong to each agreement.

The OCC's examiner handbook on receivables and inventory financing lists the categories usually treated as ineligible:

Most agreements also apply cross-aging: once some of a customer's invoices become ineligible, all of that customer's accounts can be excluded.

None of that is arbitrary: each category describes money the lender is less sure will arrive.

If your ledger is heavy in one, expect availability lower than the headline suggests, and ask for the exclusion list in writing so you can calculate it yourself. Where slow-paying customers are the whole problem, invoice financing fills the same gap by another route.

The conditions that never stop

A term loan asks a lot of you once. A facility keeps asking.

Reporting cadence. Aging reports, certificates and statements on a schedule. Lenders require an aging of receivables listing each customer's name, balance outstanding and current payment status, and the agreement sets how often the borrowing base is recalculated. Late reporting can freeze availability whether or not anything is wrong.

Conditions at each draw. Read whether the conditions apply only at the outset or must be satisfied every time you request money. The difference decides whether the facility is there when you need it.

Maintained covenants. Ratios and balances you must keep, tested on a cycle. In asset-based lines the financial covenant, when there is one, is typically a minimum fixed charge coverage ratio, and limits on capital expenditures are common.

Collateral and filings. The lender's lien on receivables and inventory should be a legally enforceable security interest under Article 9 of the Uniform Commercial Code, and it is made public through a UCC-1 financing statement, so list anything already pledged.

Review and renewal. Facilities are usually reviewed. Stale financials are a common reason for a limit to be cut, and the cut arrives without warning if the reporting has drifted.

Treat the reporting as part of the cost of the facility, because it is real work that recurs. What these obligations look like in the documents is covered in application and repayment.

What to prepare before the first conversation

The last one does more work than the rest combined. A lender can price a gap with an identified source of repayment, but a request that cannot name what closes the loop reads as something other than a working capital need. How that is treated varies by trade: loans by industry covers where cycle differences bite.

The full structural background is in lines of credit.

Published requirements for an SBA-backed line

Bank criteria are private, but SBA's are public. To be eligible for 7(a) loan assistance, a business must be an operating business, operate for profit, be located in the U.S., be small under SBA size requirements, not be a type of ineligible business, not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources, and be creditworthy and demonstrate a reasonable ability to repay the loan. You apply directly through a local lender, never through SBA.

The 7(a) Working Capital Pilot offers monitored lines of credit and spells out who fits: a business that can benefit from a line of credit up to $5 million, has at least one year of operating history, and can produce timely and accurate financial statements, accounts receivable and accounts payable agings, and inventory reports. Its terms are fixed in public: a maximum maturity of 60 months, a guarantee of 85% on $150,000 or less and 75% above that, and interest that cannot exceed the base rate plus 6.5% on $50,000 or less, plus 6.0% from $50,001 to $250,000, plus 4.5% from $250,001 to $350,000 and plus 3.0% from $350,001.

Within the 7(a) family, revolving lines of credit are permitted only under SBA Express, Export Express or CAPLines. CAPLines is an umbrella program for short-term and cyclical working-capital needs: the Seasonal CAPLine finances seasonal increases in receivables and inventory, the Contract CAPLine finances the costs of specific contracts, the Builders CAPLine finances small general contractors building or rehabilitating property for resale, and the Working CAPLine provides an asset-based revolving line for businesses unable to meet credit standards associated with long-term credit.

Where to check anything specific

Criteria, advance rates and conditions belong to each institution and change. For neutral background on business financing, the SBA business guide and the FDIC's Money Smart for Small Business are reasonable starting points with nothing being sold.

Common questions

Why is a facility harder to get than a term loan of the same size?

Because the lender is underwriting a repeating process rather than a single event, and it has to stay comfortable for as long as the facility is open.

What is a borrowing base?

A limit calculated from eligible collateral rather than fixed at the outset. It moves as your reported collateral moves.

Can my availability fall without my limit changing?

Yes, on a derived limit. The stated limit is a ceiling, and the calculation decides what is available under it.

How much reporting should I expect?

Ask for the cadence in writing before signing, and treat the work involved as part of what the facility costs you.