How long is a clean-down period?

It is agreed deal by deal. US supervisory guidance mentions 30 consecutive days as a usual length for a clean-up on working capital lines, and agreements also use shorter runs or a single date. Some allow the borrower to choose when the run starts within a stated window. The longer the run, the harder it is to pass by delaying payments, which is why the length matters as much as the level.

What happens if a business fails a clean-down?

It depends on the agreement. Failure may be an event of default, a stop on further drawings or a trigger for review. In practice a lender usually asks what is stuck in the balance and why. A one-off waiver, a reduced limit, or moving the permanent part to an amortising term loan are common outcomes. A borrower who raises the likely failure before the test has more options than one who is discovered afterwards.

Do letters of credit count towards a clean-down?

Only if the clause says so. Some agreements test cash drawings alone and leave letters of credit and guarantees outstanding, on the view that they are contingent and tied to trade. Others include them, or include any amount that has been drawn under them and not reimbursed. The scope of the test should be read together with what the line is actually used for.

Are clean-down clauses still common?

US supervisors have noted that the requirement is becoming less common, and we found no official count for New Zealand, Australia or the UK. The clause remains familiar on seasonal facilities and working capital lines, and some asset-based or sponsor-backed revolvers carry different controls in their place, such as a borrowing base or a covenant that applies only when the line is heavily drawn. Whether one appears in a given file is a matter for negotiation.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Clean-Down: a Worked Example

Once a year, the line has to show it can come back.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A revolving line has no repayment schedule, so a lender needs some other way to see that the money really does come back. A clean-down provides it: the agreement requires the balance to fall to zero, or to a stated low level, for a set run of days each year or by a given date. For a business whose cash cycle turns, that is a small ask, because the low point arrives by itself. For one that has quietly used the line as long-term money, the test brings the fact to the surface and forces a decision about how that balance should be funded.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 11 — The Term Sheet War. A nine-year client brings a competitor's term sheet: 40 basis points inside your pricing, covenant-lite, and a Friday deadline. Your call first, then the senior banker's.

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PART OF Corporate Lending and Credit Risk

// 01 — WHAT THE TEST IS FOR

Working capital debt is meant to be repaid as stock and debtors turn into cash. A balance sheet shows one day of that process, and a monthly facility report shows a pattern nobody is contractually bound to act on. The clean-down creates a date on which the pattern has to show.

It is a negotiated term and not every revolver has one. It is most associated with seasonal and short-dated working capital lines. US supervisors, who call it a clean-up, describe it as evidence that the borrower does not rely on the bank for permanent funding, while noting that the requirement has become less common and that an expanding business may be unable to meet it, because its current assets are still growing.

// 02 — HOW THE CLAUSE IS WRITTEN

Test met if, on every one of N consecutive days inside the window:

drawn balance ≤ stated level

Five drafting choices decide how much the test means. The level is zero, or a low watermark set as a sum or a share of the limit. The period is a run of consecutive days, or a single date, and a single date is far easier to meet by timing a few payments. The window is fixed, or the borrower chooses when to start within a stated range. The scope says what counts: cash drawings alone, or letters of credit and guarantees issued under the line as well. The consequence varies too: some agreements make failure an event of default, while others stop further drawings or send the line to review.

The window ought to sit at the real low point of the cycle. A test set for administrative convenience in the wrong month can fail a healthy business and pass a sick one, which is why a lender reads a year of daily or month-end balances before agreeing the dates.

// 03 — THE EXAMPLE

A maker of sunscreen and after-sun lotions, constructed for this page like every figure in it, has a US$6.0m revolving line. The balance must be at or below US$300,000 for 30 consecutive days between 1 May and 31 July each year. Those terms are the example's and are not offered as a market norm. Three years, in US$m:

Peak Highest balance in Result Creditor days

best 30-day run in that run

Year 1 4.10 0.15 Pass 44

Year 2 4.60 0.25 Pass 73

Year 3 5.20 1.40 Fail 46

Year 3 looks like the bad year. The creditor column says otherwise. Cost of sales runs at about US$40,000 a day, and the usual creditor period is 45 days.

Year 2 stretch: (73 − 45) × 40,000 = US$1.12m

Year 2 without stretch: 0.25 + 1.12 = US$1.37m

Year 3 balance of 1.40:

Filling line bought from the revolver in year 2 0.45

Stock carried over two seasons 0.70

Pharmacy chain paying late 0.25

The underlying low point was already about US$1.37m a year earlier. Suppliers paid for that pass, and in year 3 they would not wait. The three components call for three different answers. The late payer clears by itself. The filling line is a long-term asset on a short-term facility, and it belongs on a term loan. The stock either sells or is written down. In this example the lender waives the breach once, moves US$0.45m to a five-year term loan, and tests again the following May with the creditor days reported beside the balance.

// 04 — WHAT IT IS OFTEN CONFUSED WITH

The naming trap is the clean-up period. Where US usage calls the annual test a clean-up, acquisition documents use clean-up period for something unrelated: a grace window after a purchase during which breaches at the acquired business are not called. Check which one a document means.

Hardcore is the same condition seen on an overdraft: the part of the balance that does not repay. An evergreen facility renews automatically unless someone gives notice, which concerns the term of the line, and such a line may or may not carry a clean-down. And a term-out is the usual remedy when a clean-down exposes a permanent need. The clean-down asks whether the balance comes back; it does not say why it failed to.

DEFINED IN ONE PARAGRAPH → · PRODUCT FILE: REVOLVING CREDIT → · SEASONAL FACILITY →

// 05 — WHERE IT DECIDES A FILE

A pass is evidence only if nothing else moved to produce it. A lender reads the test alongside creditor days, any new shareholder advances and any other facility that was drawn during the window. If the balance fell because the debt moved somewhere else, the test has measured the move and not the cycle.

A failure is the start of a conversation about what is stuck. Part of the balance may be timing, part may be growth, and part may be permanent. US supervisory guidance describes lenders separating permanent working capital from a true revolver and converting stagnant balances into amortising loans repaid from operating cash flow. If cash flow cannot carry that amortisation, the failed clean-down has revealed a serviceability question, and that is a larger matter than the covenant. Issue 06 of the drills, a seasonal line with the covenant intact, works through the same logic from the other side of a Christmas peak.

TERM-OUT → · LINE OF CREDIT VS TERM LOAN → · LOAN COVENANTS, EXPLAINED →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Board of Governors of the Federal Reserve System (US), Commercial Bank Examination Manual, section 2080.1 Commercial and Industrial Loans (November 2020), pages 1–2 — Describes the clean-up as a specified period, usually 30 days, that proves the borrower does not depend on the lender for permanent financing, and notes it is becoming less common and that an expanding business may be unable to meet it — sections 01 and the FAQ.
Office of the Comptroller of the Currency (US), Comptroller's Handbook: Accounts Receivable and Inventory Financing, March 2000 — page 9 — Describes separating permanent working capital from a revolver with a clean-up timed to the low point of the cycle, and converting stagnant balances into amortising loans — section 05.

// QUESTIONS PEOPLE ASK

How long is a clean-down period?: It is agreed deal by deal. US supervisory guidance mentions 30 consecutive days as a usual length for a clean-up on working capital lines, and agreements also use shorter runs or a single date. Some allow the borrower to choose when the run starts within a stated window. The longer the run, the harder it is to pass by delaying payments, which is why the length matters as much as the level.
What happens if a business fails a clean-down?: It depends on the agreement. Failure may be an event of default, a stop on further drawings or a trigger for review. In practice a lender usually asks what is stuck in the balance and why. A one-off waiver, a reduced limit, or moving the permanent part to an amortising term loan are common outcomes. A borrower who raises the likely failure before the test has more options than one who is discovered afterwards.
Do letters of credit count towards a clean-down?: Only if the clause says so. Some agreements test cash drawings alone and leave letters of credit and guarantees outstanding, on the view that they are contingent and tied to trade. Others include them, or include any amount that has been drawn under them and not reimbursed. The scope of the test should be read together with what the line is actually used for.
Are clean-down clauses still common?: US supervisors have noted that the requirement is becoming less common, and we found no official count for New Zealand, Australia or the UK. The clause remains familiar on seasonal facilities and working capital lines, and some asset-based or sponsor-backed revolvers carry different controls in their place, such as a borrowing base or a covenant that applies only when the line is heavily drawn. Whether one appears in a given file is a matter for negotiation.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Business relationship managerCarries a book of trading businesses — wins them, keeps them, and is the bank's voice when the answer is no.
Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Lending operations officerTurns an approval into a working facility — documentation, security, drawdown, and the register that says what the bank actually holds.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · THE LOAN · CAPACITY

A manufacturer wants a five-year loan for a machine. Its own appraisal shows a strongly positive net present value, but the machine saves little cash in years one to three and a lot in years four to eight.

What does the bank need to see?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHClean-down What is a clean-down requirement on a working capital facility?