When to Draw Your Credit Line Instead of Spending Cash on Hand

The decision comes down to a simple comparison: what does an extra dollar of your own cash earn sitting where it sits, after tax, versus what does an extra dollar of draw cost you, after tax, for the same period. When your cash yield is meaningfully lower than your draw rate, spending your own cash first and reserving the line for true gaps is the cheaper path. When your cash is parked somewhere earning close to what the line costs, the calculation gets thin enough that operational simplicity should usually win over squeezing out a small spread.

Most small and mid-sized companies never run this comparison at all and just default to whichever bucket has a lower balance that week, which quietly leaves money on the table in either direction.

A revolver typically lets you choose an interest period, often a set of weekly or monthly blocks, at the time you draw. Whatever benchmark rate applies at the start of that block is locked in for the whole period, so a draw made the day before a rate reset behaves very differently from the same draw made the day after. If you expect the benchmark to move meaningfully during a longer period, a shorter interest period gives you more chances to reprice, at the cost of more frequent administrative work.

This is also where the unused commitment fee matters. You're often paying that fee on the undrawn portion of the facility regardless of whether you draw, which changes the true marginal cost of a draw versus what the headline draw rate suggests.

Instead of drawing reactively when the checking account balance looks low, tie draw timing to your actual payment run schedule. If your accounts payable runs happen on a predictable weekly or biweekly cadence, you can size a draw to cover exactly that run and repay it as receivables clear, rather than carrying a larger, vaguer balance that sits outstanding longer than any specific need requires.

This also makes covenant timing easier to manage, since you know in advance roughly how much will be outstanding on any given date instead of finding out after the fact.

Drawing earlier than you need to means paying interest on cash you're not yet using, which erases whatever spread you were chasing. Drawing too late means scrambling for a same-day or next-day draw against a lender's cutoff time, and some agreements charge a higher rate or require extra notice for anything outside standard processing windows.

Minimum draw sizes are the other trap. Say your facility sets a $25,000 minimum draw and a same-day cutoff time. A pattern of small, frequent draws to chase a thin arbitrage can cost more in wire fees and staff time than the spread you're capturing, even when the interest math alone looks favorable.

Before pulling from the line for anything other than a genuine payment gap, check three things: the after-tax spread between your cash yield and your draw rate, where your covenant test date falls relative to the draw and expected repayment, and whether the amount clears your facility's minimum draw size without forcing an awkwardly small or frequent pattern. If any one of those three doesn't clearly favor drawing, spending your own cash first is usually the lower-effort, lower-risk choice.

Write this test down as a one-page policy rather than reworking the logic from scratch every time someone asks whether to draw. A short, specific rule that your controller can apply without escalating every draw decision to you saves more time over a year than the interest arbitrage itself usually does, and it keeps the reasoning consistent even as different people rotate through the role.

Check these points before you pull from the line for anything other than a payment gap:

• Compare the after-tax yield on your cash with the after-tax cost of the draw for the same period.
• Check where your covenant test date falls relative to the draw and its expected repayment.
• Confirm the amount clears the facility's minimum draw size without forcing an awkwardly small or frequent draw.
• Line the draw up with your payment run schedule and the interest period reset date instead of reacting to a low bank balance.

Drawdown timing only matters within the terms your facility already sets, so it's worth revisiting those terms periodically rather than treating them as fixed once you've signed. If your interest period options are limited to long blocks and your cash flow is genuinely volatile week to week, ask at your next renewal whether shorter periods are available; a facility built for a steadier business may simply not match how your cash actually moves.

The same goes for the unused commitment fee. If you're consistently drawing a small fraction of the facility, a smaller committed line with a higher advance rate on receivables or inventory might cost less overall than a large, mostly undrawn revolver that charges a fee on the unused portion every quarter.