Why Is That Revolving Line of Credit Not Revolving?

How many times have you made available a revolving line of credit for commercial borrowers who borrow up to the maximum credit limit and keep the balance at that point all year? When this occurs, it is often referred to as an “evergreen,” “floored-in,” or “permanent” line of credit – and often frustrates lenders.

To be repaid, financial institutions must convert all or a portion of the LOC into a term loan. LOCs should be used to fund short-term obligations, such as payments to suppliers, payroll, taxes, and other immediate operational needs until the current assets are converted to cash. The conversion of assets to cash, known as the asset conversion cycle or the operating cycle, is key to understanding why that revolving line of credit is not revolving.

This session will examine in detail what causes a borrower’s short-term line of credit to become permanent working capital - whether intentional or unintentional. The presentation will distinguish between the two and provide a deeper understanding of the impact and interrelationship of sales, current assets, profits, cash flow, and creditors on the line of credit.