Before You Count on Your Credit Line, Check the Terms

On November 2, the Federal Reserve released its October lending survey, covering changes that generally correspond to the third quarter. Banks reported modestly tighter approval standards for smaller businesses, while standards for large and middle-market firms were broadly unchanged. In this survey, small means annual sales below $50 million, not just a neighborhood shop.

It’s worth keeping the scale in perspective. In the detailed responses, 54 of 59 banks answering the small-business standards question reported no meaningful change. Four tightened and one eased. That is a modest net tightening, not evidence that banks have stopped lending.

The Fed also reported tighter collateral requirements and more use of interest-rate floors for smaller firms, on balance. Most other business-loan terms eased or stayed broadly unchanged. Our takeaway is not to panic about a credit crunch. It’s to look past the rate and make sure you understand the conditions attached to the money you’re counting on.

For an asset-based line, the amount available depends on the collateral that qualifies under the agreement. The OCC’s asset-based lending handbook explains how advances are limited by eligible collateral and the facility’s commitment. An invoice on your books is not automatically an invoice the bank will lend against.

Consider a hypothetical situation: your company has a $2 million line, but its borrowing base supports only $1.5 million. You have already borrowed $1.2 million. Assuming no other deductions or restrictions, and that all draw conditions are met, the remaining capacity is $300,000. It isn’t $800,000, and it certainly isn’t $2 million.

That difference matters when someone says, ‘We can cover it with the line.’ Before committing to a purchase, an expansion, or a payment schedule, you need to know which number they mean. The answer should come from current records and the agreement, not the amount printed at the top of an old term sheet.

If a customer pays late, the obvious problem is missing cash. But if that receivable becomes too old to qualify under your borrowing-base rules, it can also reduce the amount you can borrow. You may have less financing available at the very moment you need more. Whether that happens depends on your agreement and the rest of your collateral.

This is why a cash forecast and a borrowing-availability forecast belong together. Move a large customer payment back a few weeks. Then check both the bank balance and the borrowing base. Don’t assume the line automatically fills whatever hole appears in the cash forecast.

The same discipline matters when a refinancing deadline is approaching: money you hope to obtain and money you can actually use are different things. Neither a national survey nor a friendly lender conversation can settle the question for your particular business.

You don’t need to turn this into a complicated exercise. Ask the finance team and lender to work through four questions using the same current numbers:

• How much can we draw today, after outstanding borrowings, reserves, letters of credit, and any other applicable deductions?
• What could reduce that amount? Check overdue receivables, inventory eligibility, reporting requirements, and other conditions in the agreement.
• What would the line cost under the rate scenarios in our forecast? Check the benchmark, margin, fees, and any interest-rate floor that limits how far the rate can fall.
• If collections slow, when would we need a change to the facility, and how long would the lender need to consider it? An expected amendment is not an approved one.

Put the answers alongside the cash assumptions behind a 2027 budget. If the forecast relies on borrowing that isn’t currently available, show that separately and identify what has to happen before it becomes available. A spreadsheet shouldn’t quietly turn a financing request into a financing commitment.

This week’s survey is a useful reason to revisit the details, not a reason to assume your bank is about to pull its support. The question is simpler: does the financing you have work the way your operating plan assumes it does?

You may find that everything lines up. If it doesn’t, you can adjust spending, work on collections, or discuss a different arrangement while there is still time to evaluate it. The useful number isn’t the size of the credit line. It’s how much you can use when the business needs it.