Skip to content
GLOSSARYTERMS AS A CREDIT DESK USES THEM

Liquidity headroom

What is liquidity headroom, and how does a lender measure it?

ONE OF 366 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Liquidity headroom is the cash a business could actually lay its hands on: cash in the bank plus the undrawn part of committed facilities, less any cash it cannot use, such as money held offshore or as security. A lender measures it at the lowest point in the forecast, often mid-month or in the week of a large tax or payroll payment, rather than at a reporting date. It also asks whether the undrawn lines would still be there: a facility that stops on a covenant breach or a shrinking borrowing base offers headroom that disappears in the same week the business needs it.

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.

// WHAT IT IS NOT

Liquidity headroom is a measure; a liquidity covenant is the clause that sets a minimum for it. Covenant headroom is different again: the distance between a covenant result and the level that would breach it.

// WORKED IN

// NEXT TO IT

READING THE NUMBERS

All 366 terms on one page