Both can support working capital, but they are not interchangeable. Cash can cover an urgent obligation without a lender decision, while a credit line may preserve cash for other needs but introduces borrowing cost, covenants and availability conditions. A bank may change limits or require documents before drawing funds. Plan from cash first, understand the legal facility terms, and model borrowing as financing rather than as operating revenue.
Formula and definitions
Formula: Liquidity available today = unrestricted cash + only the credit amount that is currently drawable under its terms
Give cash reserves a specific purpose
A reserve can cover payroll, supplier deposits, tax deadlines, equipment failure or a temporary drop in collections. The right target depends on fixed obligations, business volatility and access to other funding. Separate a minimum operating reserve from money earmarked for tax or client commitments. If every cash dollar is assigned to another bill, the business may have a high bank balance without meaningful contingency liquidity.
Understand the credit line conditions
A credit agreement may specify borrowing-base rules, renewal dates, collateral, covenants, fees or limits on use. The nominal limit is not proof that all funds can be drawn in every situation. Availability can depend on receivables, inventory, financial reporting or lender approval. Note the interest calculation, minimum payments and repayment requirements. A credit line is most useful when the borrower can explain both the trigger for drawing and the source of repayment.
Compare the cost of holding cash
Cash may earn interest but can also have an opportunity cost if the funds could reduce expensive debt or support productive operations. A credit line creates interest and potential fees, while preserving cash may protect against revenue volatility. Compare the after-tax return, financing cost and likelihood of needing emergency funds. The lowest expected financial cost is not always the safest choice if it leaves the business unable to meet obligations during a downturn.
Build a layered liquidity policy
Define an ordinary operating minimum, a reserve target and circumstances that permit a credit draw. For example, reserve cash may cover normal payroll, while a committed credit line supports a temporary receivables delay after approval. Include repayment in the forecast and avoid rolling a short-term problem into permanent debt. Review the policy with actual cash movements and renewals; it should reflect lender conditions, not just a spreadsheet line labelled available credit.
Worked example
A company has $60,000 of unrestricted cash and a $100,000 revolving facility, but only $70,000 is currently drawable after borrowing-base restrictions. Its immediate theoretical liquidity is $130,000 before outstanding cheques or other commitments, not $160,000. If it draws $25,000 to bridge an invoice delay, the forecast should show both the cash receipt and the future principal and interest repayment. The draw buys time; it does not create profit.
| Item | Calculation or value | Meaning |
|---|---|---|
| Unrestricted cash | $60,000 | Already held |
| Facility limit | $100,000 | Contract ceiling |
| Currently drawable | $70,000 | After borrowing conditions |
| Combined liquidity estimate | $130,000 | Before commitments and fees |
Common mistakes
Do not count a credit line that is expired, undrawn but unavailable, or subject to an unmet covenant. Do not hide the repayment schedule after a draw. Do not use borrowed cash to conceal a persistent operating loss without a credible corrective plan.
Next steps
Maintain a weekly cash forecast and a separate facility record showing limit, current availability, rate, fees, maturity and covenant conditions. Identify who may approve a draw and which forecast signal triggers it. Confirm the bank’s current availability rather than relying on last quarter’s paperwork.
Frequently asked questions
Is a credit line part of revenue?
No. A draw is financing and brings a repayment obligation.
Should the reserve be zero if credit is available?
No. Access conditions and lender discretion mean cash reserves still provide independent protection.
Related tools and guides: Reserve sizing guide · Forecast cash by week · Compare financing rates