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, 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 INWorking 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 INIssue 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