A credit limit does not tell you how much cash you have

A revolving line can show a $100,000 limit while the business has $15,000 in its bank account. Both numbers can be correct. The trouble starts when the owner treats the larger one as money already received.

Keep four amounts separate: the approved limit, the balance already drawn, the amount currently available to draw and the cash actually in the bank. They answer different questions. Adding the limit to the bank balance can count borrowing that has already happened a second time.

Give each number a job

The approved limit describes the line's stated borrowing ceiling. It does not describe a deposit. The OCC's banking glossary defines a line of credit as an authorization to borrow within a specified limit and distinguishes that authorization from loan proceeds actually disbursed.

The drawn balance is the principal already borrowed and not yet repaid. For this explanation, keep that principal separate from interest or fees that may also appear on an account.

Available to draw means the additional borrowing permitted now, under the line's current terms and conditions. Do not automatically substitute the original limit minus the drawn balance.

Cash in the bank is money already in the deposit account, whatever its source. Some may have come from a previous draw. Even then, check what is usable: the OCC glossary distinguishes an account's available balance from amounts subject to holds, uncollected funds or restrictions. And usable money may already have a job, such as an upcoming supplier payment.

Follow one draw through the numbers

Use an invented line with a fixed $100,000 limit. Assume the business has drawn $40,000 and has $15,000 of fully available bank cash. Every borrowing condition is satisfied. There are no holds, reserves, borrowing-base restrictions, pending transactions, interest or fees in this exercise. Each transfer posts immediately, and each repayment shown reduces principal in full.

Only under those supplied conditions does available credit equal the limit minus drawn principal.

Invented revolving-credit movements

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The draw raises bank cash by $20,000 and drawn debt by the same amount. It also uses $20,000 of the remaining borrowing capacity. Before the draw, bank cash plus undrawn capacity was $75,000. Immediately afterward, it is still $75,000. That combined figure includes potential borrowing; it is not a $75,000 cash balance.

The supplier payment then uses $12,000 of cash without reducing the loan. The later principal repayment moves $10,000 out of the bank and reduces the debt. Under these assumptions, that repayment restores $10,000 of capacity, not $10,000 of bank cash.

At the end, the business has $13,000 in the bank and could borrow another $50,000 under the invented terms. Describing either the $100,000 limit or the $50,000 remaining capacity as cash would hide what still has to happen before a payment can be made.

Why the unused amount may be smaller

Real availability needs its own check. The OCC's asset-based lending handbook, on printed page 3, describes revolving facilities constrained by a borrowing base and sometimes a minimum unused amount, called a hard block. Continued access also depends on the agreement's conditions. These are features of the asset-based arrangements described there, not terms to assume for every business line.

Consider a separate invented branch, starting again with $40,000 drawn against a $100,000 stated limit. Suppose the current borrowing base permits only $70,000 of total principal and there are no other restrictions. That leaves $30,000 to draw, not $60,000. If that base falls to $55,000 while principal remains $40,000, only $15,000 remains in this branch. The bank cash has not changed merely because that borrowing capacity changed.

A repayment can reduce principal while another constraint limits the next draw. A required unused reserve can also narrow access. Neither the amount nor the timing of restored availability should be inferred from the repayment alone. The actual agreement and current account information have to supply those answers.

Check what will reach the account

Before relying on the line for a bill, put the four figures beside one another as of the same time. Ask what limits a new draw today, whether a recent repayment has restored availability and when a requested transfer would become usable bank funds. Keep a requested draw separate from money already received.

Then put the bill on its payment date. The existing cash-calendar example follows receipts and payments through time. This check comes just before it: which resources are already cash, and which still require borrowing?

An unused line may provide useful flexibility. Its value is easier to judge when the plan shows both the access still required and the debt a draw would create.

Read the story behind the decisions

In his business memoir Infinite Upside: Building Wealth With Room to Live, Vijay Sheth follows the business decisions and the life around them. Read the opening, then choose an edition.