How to think about Revolver Size and Revolving Credit Capacity?

September 18, 2023

by an investor in Boston, MA, USA

Curious to get any lender's thoughts on an appropriate, reasonable request for a revolving credit facility. Is there an appropriate formulaic way to think about the revolver capacity in the context of Accounts Receivable or overall Net Working Capital or the T12 NWC Average? What are the typical bands or ranges for those formulaic metrics? Just want to understand what is a fair, reasonable ask vs. an aggressive ask?

How much does leverage factor into the capacity consideration? Or is the revolver purely a function of the working capital base and needs?

Thanks!

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

The amount of leverage you need really depends on three things. First, there is the assets you have to pledge as collateral. Most lenders will advance 75% to 90% of A/R (depending on the type of lender). However, typically they will only advance on A/R that is current, usually within 60 to 90 days. They may also further limit borrowings based on concentration risks or what is referred to as cross-aging. With cross-aging if a large enough percentage of the A/R (usually 20 to 25%) with one customer is over the 60 or 90 day limit, many lenders will then not advance anything on that customer assuming all the A/R with that customer could go bad.

Secondly, there is the amount of debt cash flow will support. You will have to show historical cash flow or projected cash flow to support the annual interest payments on the line of credit usually on a stressed basis with the line fully drawn for the entire year. However, for some asset based lenders or factoring companies, they really do not worry about cash flow, so this is really only a concern for more conventional lenders.

Lastly, availability is going to be limited based on need. Most lenders will not just provide a company with a $5 million dollar credit if a cash flow analysis shows they really would only need $1 million at any given time. Bank's do not want to make too much credit available if there is not a real need for it. Bank's also have to reserve capital for unfunded line balances, which comes at a cost, so Bank's typically do not want a line that exceeds what a customer could need.

I hope this helps. If you would like to discuss further I would be more than happy to do so. You can reach me here or directly at redacted

Reply by a searcher
from Iowa State University in Chicago, IL, USA

^redacted‌ could you opine?

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