What is the cash conversion cycle, and how does a lender use it to size a facility?
The cash conversion cycle is the number of days between paying for inputs and collecting the cash a sale produces: debtor days plus inventory days minus payables days. A lender uses it as the arithmetic behind a working capital limit — the cycle in days, divided by 365, multiplied by revenue, gives the working capital the business carries at its current size (strictly, debtor days on revenue and inventory and payables days on cost of sales), and the same calculation run on the revenue increment gives what recent growth has absorbed. Sizing the need this way before reading the borrower's request is what makes the request legible: it is either inside that number, roughly equal to it, or a fraction of it, and each of those is a different conversation.
CHAPTER 3 OF THE BOOKReading Real Demand vs. Plugging Holes
WORKED INWorked example with the arithmeticWorking capital case studyThree Diagnostics calculator
What is a working capital facility, and what is it actually sized against?
A working capital facility — usually a revolving limit rather than a term loan — funds the gap between paying suppliers and being paid by customers. It is sized against the cash conversion cycle applied to the revenue base, not against the borrower's stated need and not against the value of security. The most common structural failure in commercial lending is a working capital need financed as term debt, or a limit set to a round number that has no relationship to the cycle it is meant to bridge.
CHAPTER 3 OF THE BOOKReading Real Demand vs. Plugging Holes
WORKED INProduct file: Revolving Credit FacilityIssue 01 — Pacific Premium FoodsIssue 04 — Highview Industries
What does “quality of earnings” mean in credit, and how is it tested?
Quality of earnings is the question of whether reported profit is real enough to lend against. A profit figure is an opinion assembled by people with incentives; cash is a fact. The test runs three angles in parallel: whether profit converts to operating cash, whether the balance sheet is moving in a direction the profit story explains, and what the language of the disclosure itself reveals. Positive EBITDA alongside negative operating cash flow is not a funding gap — it is a conversion problem, and lending against it does not fix it.
CHAPTER 4 OF THE BOOKReading the Numbers Behind the Numbers
WORKED INIssue 01 — Pacific Premium FoodsThree Diagnostics calculator
What do debtor days (DSO) tell a lender that revenue growth does not?
Debtor days, or days sales outstanding, measure how long a business waits to be paid after invoicing. The level matters less than the direction: debtor days lengthening faster than revenue grew means customers are paying more slowly, not merely that there are more of them — and the difference decides whether a facility increase funds a growth cycle or funds a deterioration. A stable ratio can also conceal a moving composition, as ten balanced customers become three dominant ones at the same average.
CHAPTER 4 OF THE BOOKReading the Numbers Behind the Numbers
WORKED INIssue 01 — Pacific Premium Foods
What is a borrowing base, and when is it the wrong answer?
A borrowing base ties a facility limit to the eligible assets behind it — typically a percentage of current receivables and inventory, reported and recalculated monthly. It is the right structure where the risk is that the asset pool shrinks faster than the limit does. It is the wrong structure on a clean file: conditions cost the borrower administrative weight every month and tell a good client the bank read a template rather than the numbers. Intensity of structure is a scarce resource priced in relationship currency.
CHAPTER 3 OF THE BOOKReading Real Demand vs. Plugging Holes
WORKED INIssue 04 — Highview Industries
What is covenant headroom, and why does the test date matter as much as the ratio?
Covenant headroom is the distance between a borrower's current performance and the level at which a covenant is breached — enough room that ordinary volatility does not trigger extraordinary process. Headroom is only half the question. A covenant tested on calendar dates against a business running on a trade cycle can print its worst ratio at the same point every year while nothing is deteriorating, because the test lands when the facility is drawn and the receipts have not yet arrived. Before repricing or declining, ask whether the covenant date is the problem.
CHAPTER 6 OF THE BOOKSpotting Trouble Before It Spots You
WORKED INThe 90-day mismatch
What is a “second way out”, and why does a lender ask for one?
The first way out is the borrower's ordinary cash flow. The second way out is what repays the debt when that cash flow does not arrive — asset sale, refinance, sponsor support, guarantee — and a lender asks for it because the first way out is a forecast and the second is a structure. The useful version of the question is not whether a second way out exists on paper but what it would actually recover, and how quickly, in the state of the world where it is needed.
WORKED INIssue 03 — Kauri Dairy Holdings
What does releasing a personal guarantee actually cost the bank?
A personal guarantee release removes a named individual's obligation to repay if the borrower cannot. It reads as an administrative amendment and behaves as a one-way door: the guarantee does not come back when conditions worsen, and the request usually arrives at a cycle high, when the numbers make it easiest to say yes. The disciplined form is to stage a release against demonstrated performance rather than granting it against a good year.
WORKED INIssue 03 — Kauri Dairy Holdings
When does customer concentration stop being a fact and start being a credit issue?
Customer concentration is the share of revenue a business draws from its largest customers. It becomes a credit issue at the point where the borrower's capacity to service debt depends on a relationship the borrower does not control — and the tell is not the percentage but the terms: how the contract can be ended, how much notice it requires, and whether the assets funded against that revenue have any other use. A business can be one relationship with operations attached, and lending to it is a different proposition from lending to a diversified book of the same size.
CHAPTER 5 OF THE BOOKReading the Industry, Not Just the Borrower
Why does a lender care which currency a facility is drawn in?
A multi-currency facility lets a borrower draw in more than one currency under a single limit. The credit question is not the convenience but the match: an exporter paid in one currency and carrying costs in another has an exposure that a facility can either hedge or amplify, depending on how the sub-limits are drawn. A borrower who cannot produce a currency schedule is not creating a documentation delay — the reluctance is information about the exposure.
WORKED INIssue 02 — Aoraki Trade Exports
What does it mean for a business to be “bankable”?
Bankability is not a feeling about a business and not creditworthiness in the narrow sense. It is a short list of claims that hold up when read by people who were never in the room: which parts of the story are already visible in statements and contracts, whether the institution's interest is a question of whether or a question of when, and whether the structure survives four quarters in which nothing improves. A business can carry excellent earnings and still present an unbankable situation, because the request is vague or the information arrives in a form no committee can process.
WORKED INWhat bankability really means
What is a commitment fee, and why do banks charge for money that has not been drawn?
A commitment fee is the charge on the committed but undrawn portion of a facility, most visibly on revolving credit facilities. The bank must hold capital and plan funding against the whole committed limit — if every client drew in full tomorrow, the bank has promised to fund it — so the undrawn half of the promise has a real cost, commonly somewhere around half to one and a half percent per annum. It is the item borrowers most often discover after signing rather than before, which is why an honest quote is the all-in cost at several utilization levels, never the headline drawn rate alone.
WORKED INProduct file: Revolving Credit FacilityHow Banks Work — why capital is scarce
What is a clean-down requirement on a working capital facility?
A clean-down is a covenant requiring a revolving facility's balance to return to zero, or a stated low watermark, for a continuous run of days — commonly around thirty — within every rolling year. It is the bank's working-capital lie detector: a business whose cash cycle genuinely revolves passes through a natural low point annually, so the clean-down merely evidences what is already true. A facility that cannot clean down has told the bank, in data, that the need is permanent — and permanent needs are priced and structured as term debt, not carried indefinitely on a working capital line.
WORKED INProduct file: Revolving Credit FacilityIssue 06 — a seasonal facility with the covenant intact
What does self-liquidating mean in trade finance?
A facility is self-liquidating when the financed transaction itself generates the repayment: a trade loan clears from the buyer's payment, a discounted letter of credit clears from the issuing bank's settlement at maturity. The phrase describes a design, not a guarantee — self-liquidation holds only if the trade completes, the payer performs, and the money actually routes to the account the bank controls, and a credit desk assesses those conditions separately. When the mechanism fails, the loan does not disappear; it degrades into an ordinary exposure on the borrower, at a price that was set for something safer.
NOT Not a synonym for low-risk: the repayment logic is cleaner than other lending, and precisely because everything rides on one transaction, the failure of that transaction is the whole risk.
WORKED INProduct file: Trade LoanProduct file: LC Discounting
What is a balloon payment on a business loan?
A balloon is the larger amount left owing at a term loan's maturity because the scheduled instalments deliberately do not amortise the debt to zero. It is legitimate where the financed asset retains real value at the end, or where a credible refinancing genuinely exists; it is dangerous where it is simply how an unaffordable loan was made to look affordable. A credit desk reads every balloon as a deferred credit decision — someone, at maturity, in conditions nobody can see today, must refinance or repay — and asks who is carrying that refinance risk and whether they know it.
WORKED INProduct file: Term Loan
What is amortisation on a term loan, and why do banks insist on it?
Amortisation is the scheduled repayment of principal across a loan's life, usually inside a level monthly instalment covering principal and interest together. It does two jobs at once: the bank's exposure falls in step with the ageing of whatever was financed, and the borrower's total interest cost falls dramatically, because interest is charged on the outstanding balance and amortisation roughly halves the average balance over the term. On a five-year loan, full amortisation can cost close to half the total interest of an interest-only structure with principal repaid at maturity.
WORKED INProduct file: Term Loan, with the worked arithmetic
What is the debt service cover ratio, and how does a lender actually read it?
Debt service cover is the earnings available for debt service divided by the scheduled principal and interest for the period — the central serviceability test on term lending, and usually its lead covenant. The reading discipline matters more than the number: cover is assessed against the bad year, not the average one, because a multi-year loan lives through whole cycles and the average year repays nothing if the worst year defaults. There is no universal minimum — the cover a lender wants scales with the volatility of the earnings providing it, which is why a stable utility and a project builder are read to different standards.
NOT Not interchangeable with interest cover: DSCR includes scheduled principal and is therefore the harder test on any amortising loan.
WORKED INProduct file: Term LoanHow Banks Manage Credit Risk
What is interest cover, and how is it different from debt service cover?
Interest cover is operating earnings divided by interest expense: how many times over the business earns its interest bill. It ignores principal repayments, which makes it the natural test for revolving and interest-only structures where no principal is scheduled — and an incomplete one for amortising loans, where debt service cover does the real work. A desk reads the two together: comfortable interest cover with thin debt service cover describes a business that can afford its interest but not its loan, which is a structure problem before it is a credit problem.
WORKED INCredit analyst interview questions — the technical floorProduct file: Revolving Credit Facility
What is dilution in invoice finance?
Dilution is the percentage of invoiced value that never converts to cash — eroded by credit notes, rebates, disputes, returns and adjustments rather than by debtor insolvency. It is the number non-specialists miss when they look at a receivables book, and the one that sets the honest advance rate: a ledger that quietly dilutes at eight percent cannot safely support a ninety percent advance, whatever its aging profile looks like. Financiers study dilution history before setting terms because it behaves like a trading characteristic of the business, not a one-off event.
WORKED INProduct file: Invoice Finance
What is an advance rate in receivables and trade finance?
The advance rate is the percentage of eligible collateral value a financier will fund — commonly somewhere around seventy to ninety percent of eligible receivables in invoice finance, and around seventy to eighty-five percent of trade value on a trade loan. The unfinanced margin is structure, not meanness: it keeps the client's own money in the transaction and absorbs the uncontrollables — disputes, currency movement, dilution — before the facility goes underwater. A request to finance one hundred percent of anything is itself information, and the question it raises is why the client has no margin of their own in a deal they expect to profit from.
WORKED INProduct file: Invoice FinanceProduct file: Trade Loan
What is hardcore on a business overdraft?
Hardcore is the portion of an overdraft that never repays — the floor under the fluctuation. A healthy overdraft oscillates through zero as receipts and payments pass; one that has not seen the right side of a certain balance in a year is really a core debt of that size with a smaller true overdraft on top. Hardcore is the overdraft's version of a failed clean-down: permanent need wearing a short-term product, on the most expensive and least dependable money available — and the desk's response is the same in both cases, which is to name it and restructure the permanent part into a product built for permanence.
WORKED INProduct file: Business OverdraftProduct file: Term Loan
