A facility that is too small starves the business. One that is too large costs more than it earns and invites misuse. The right size is not a round number; it comes from how long a company’s cash is tied up between paying for goods and being paid for them.
The cash conversion cycle
Three numbers set the rhythm:
- Days inventory outstanding (DIO): how long stock sits before it sells.
- Days sales outstanding (DSO): how long customers take to pay.
- Days payable outstanding (DPO): how long the business takes to pay its own suppliers.
The cash conversion cycle is DIO plus DSO, minus DPO. It is the number of days the company funds its operations out of its own pocket. A distributor that holds stock for 35 days, collects from customers in 40, and pays suppliers in 30 is out of cash for 45 days on every turn. That gap, multiplied by the value moving through it, is the facility the business actually needs.
Working backwards to the structure
Once the gap is clear, the structure follows:
- Size tracks the peak funding need across the cycle, not the average. Seasonal peaks (a harvest, a back-to-school surge, a Ramadan or festive build-up) set the limit.
- Tenor matches how the exposure clears. A line that funds a 45-day cycle is repaid as receivables arrive, then drawn again. It revolves; it is not term debt.
- Instrument follows the trade. A confirmed order to a known buyer suits a letter of credit, a recurring supplier relationship suits a confirming line, and a one-off shipment suits spot credit.
Where it goes wrong
The common error is sizing to revenue instead of to the cycle. A business with strong turnover can still be illiquid if its cash is locked in slow-paying receivables. Sizing to the cycle keeps a facility a tool rather than a trap, and it hands the lender a clean repayment story, which is half of getting the line approved at all.