Size a working capital line to your peak need, not your average. Start with the working capital cycle: receivable days plus inventory days minus payable days, applied to your sales and cost of sales, month by month. Subtract the part of working capital that equity and term debt already fund. The largest remaining gap in the year, plus a cushion for a slow customer or growth, is the line you need. The lender then caps it at what your borrowing base or earnings support. If those caps fall short of the peak, fix the structure before signing.
- Start with
- Receivable days + inventory days − payable days
- Size to
- The peak month of the year, plus a cushion, not the average
- Asset-based cap
- The borrowing base: typically 80% to 90% of eligible receivables, plus inventory
- Cash-flow cap
- Earnings capacity; banks commonly look for at least 1.25x debt service coverage
- Permanent need
- Working capital you carry all year belongs in term debt or equity, not the line
The working capital cycle
Every business that sells on credit or holds stock pays for its goods and labor before its customers pay it. The time between the two is the cash conversion cycle, and it is the starting point for sizing a line:
- Receivable days: how long customers take to pay, measured as receivables divided by daily sales
- Inventory days: how long stock sits before it is sold, measured as inventory divided by daily cost of sales
- Payable days: how long you take to pay suppliers, measured as payables divided by daily cost of sales
Receivable days plus inventory days, less payable days, is the number of days of operations you have to finance yourself. Multiply each piece by the daily figure it is based on and you have the net working capital the business carries.
| Item | Basis | Days | Amount |
|---|---|---|---|
| Annual sales | 36,500, or 100 a day | ||
| Annual cost of sales | 25,550, or 70 a day | ||
| Receivables | Daily sales × receivable days | 50 | 5,000 |
| Inventory | Daily cost of sales × inventory days | 60 | 4,200 |
| Payables | Daily cost of sales × payable days | 35 | (2,450) |
| Net working capital | 75-day cycle | 6,750 |
Each day of the cycle is worth something concrete. In this example, a customer base that pays ten days slower adds 1,000 of receivables to be financed; a supplier that shortens terms by ten days removes 700 of payables. Those are the movements that exhaust a line that was sized on a good month.
Peak need, not average need
The annual figures above describe an average. Very few businesses have average months. A distributor builds stock ahead of its selling season, a contractor bills in arrears on large jobs, a manufacturer carries a customer's order through production before it can invoice. Working capital swings, and the line has to cover the top of the swing.
| Quarter-end | Receivables | Inventory | Payables | Net working capital | Line need |
|---|---|---|---|---|---|
| Q1 | 4,200 | 3,600 | (2,100) | 5,700 | 1,200 |
| Q2 (inventory build) | 5,000 | 5,200 | (2,700) | 7,500 | 3,000 |
| Q3 (selling peak) | 6,400 | 4,800 | (3,000) | 8,200 | 3,700 |
| Q4 | 5,200 | 3,400 | (2,300) | 6,300 | 1,800 |
Average line need across the year is about 2,425. Peak need is 3,700. Quarter-ends keep the table short, but the real peak often falls between them, which is why the sizing is done month by month. A line sized on the average runs out in the third quarter, when receivables are at their highest and suppliers who shipped the build are waiting to be paid. Add a cushion to the peak for the things that happen at peaks: a large customer paying late, a supplier asking for deposits, sales running ahead of plan.
Look at the trough too. This business needs 1,200 from the line even at its lowest point. That part of the need never goes away, and it is better funded with term debt or equity. Some bank lines require an annual clean-up period when the balance must fall to zero or close to it; a business that treats permanent working capital as seasonal cannot meet that requirement. See line of credit vs term loan for how to split the two.
Fund the trough with term debt or equity, and the swing with the line. A line carrying permanent working capital is a term loan with worse terms.
Growth consumes working capital
Growth makes the problem larger every year. If the example business grows sales from 36,500 to 43,800 with the same cycle, daily sales rise from 100 to 120 and net working capital rises from 6,750 to 8,100. That extra 1,350 has to be financed before the new sales produce any profit, which is why fast-growing, profitable businesses so often run short of cash.
Sizing a line for a growing business means modeling next year's peak, not this year's. It also points toward an asset-based line, whose borrowing base grows with receivables and inventory, rather than a cash-flow line fixed at a multiple of last year's earnings.
How the lender caps the number
Your need is one side of the sizing. The lender's limit is the other, and it depends on which kind of line you are getting.
On an asset-based line, what you can draw is capped by the borrowing base: typically 80% to 90% of eligible receivables and up to 85% of the net orderly liquidation value of inventory, which is roughly half of cost, less reserves and any inventory sublimit. The critical check is the base at the peak month. A seasonal business is often tightest during the inventory build, before the goods become receivables: need is already climbing, but the base is weak because inventory advances at a much lower rate than receivables. The commitment should cover peak need, and the base at that month has to support it.
On a cash-flow line, the lender sizes the commitment from earnings. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA across all senior debt, and conventional banks commonly look for debt service coverage of at least 1.25x. SBA's own minimum is 1.15x, rising to 1.25x on historical results for a change of ownership from 1 October 2026. A revolver sized this way does not grow with the business, and it has to share that capacity with any term debt. For the full picture, see how much debt a business can carry.
What an undersized line costs
It is tempting to take the line a lender offers and make it work. An undersized line fails in predictable ways:
- It runs out at the peak. The line is fully drawn exactly when receivables and inventory are highest and suppliers most need paying.
- It blocks other lenders. The line lender usually holds a first lien on receivables and inventory, often all assets. When it is exhausted, no other lender can step in against the same collateral without its consent.
- It pushes the business to expensive fixes. Stretched suppliers, lost early-payment discounts, and in the worst cases a merchant cash advance taken to bridge the gap, which then competes with the line for the same collections.
- It invites covenant trouble. Low availability can trigger springing tests, cash dominion and weekly reporting. See line of credit covenants.
- It carries most of the fixed cost of the right line. Legal work, exams and reporting do not shrink much with the commitment. A line that is too small carries the burden without doing the job.
An oversized line has a cost too, mostly unused-line fees and a larger commitment to police, but it is a far smaller problem. When the lender's cap falls short of peak need, the fixes are structural: a seasonal overadvance or temporary increase agreed in advance, a term loan for the permanent part, better eligibility through a cleaner aging, or a different lender whose advance rates and sublimits fit the collateral.
What to bring to a lender
Transparent's line of credit checklist covers the AR aging by customer with days outstanding, the AP aging, the balance sheet, the P&L, a year-to-date P&L through last month-end, the debt schedule with existing liens, and an inventory report if inventory is in the base. For sizing, add what lenders use to see the swing: monthly balance sheets across at least a full year, so receivables, inventory and payables can be read at the peak and the trough, and a monthly forecast of the coming year that shows where the peak falls.
Transparent's financing model builds that month-by-month view from the borrower's own figures, calculates the borrowing base at each month-end and sets it against need, so the commitment is sized to the peak before the line is marketed. The full lender package is built in a day once the documents are in, and it is matched against the 235 lenders in the book that write asset-based loans and lines. See what the package contains.
Common questions
- Should I size my line to my average or peak working capital?
- Peak, plus a cushion. The average understates what you need in the months that matter, and a line that runs out at the peak leaves you short exactly when suppliers and payroll are largest.
- How do I calculate my working capital need?
- Add receivable days and inventory days, subtract payable days, and apply each to daily sales or cost of sales. Do it month by month over a full year to find the peak, then subtract what equity and term debt already fund.
- Can a line of credit fund permanent working capital?
- It can, but it is a poor fit. The level of working capital you carry all year is better funded with term debt or equity, especially if the line has an annual clean-up period. Use the line for the seasonal swing.
- What if the lender's borrowing base is smaller than my peak need?
- Find out which constraint binds: eligibility, advance rates, the inventory sublimit or reserves. Then fix it, negotiate a seasonal overadvance, add a term piece for permanent need, or go to lenders whose terms fit the collateral.
- Does growth change how much line I need?
- Yes. Working capital rises roughly in step with sales if the cycle holds, so a growing business needs a larger line each year. Size to next year's peak, not this year's.