The short answer
The Federal Reserve's September 2026 increase set the rate environment a $5M to $50M company is managing cash in now: prime at 7.00%, a line of credit that costs more each month it is drawn, and idle cash that has a real cost if it sits in a checking account while the line is used. Cash management in this environment means sorting cash into operating, buffer and surplus, sizing the buffer from your own obligations rather than a rule of thumb, deciding deliberately between paying down the line and holding reserves, shortening the cash conversion cycle, and watching covenant headroom before the lender does.
On September 16, 2026, the Federal Reserve raised the target range for the federal funds rate by a quarter point to 3.75% to 4.00%, and banks moved prime to 7.00% the next day. At its October 28 meeting the Fed held the range there, so the September level is the one owners are living with as they close out the year, with the next meeting in December. The 10-year Treasury yield, which drives fixed rates on term loans, was 4.90% on November 4 (FRED), down from above 5% in mid-October.
None of this is dramatic on its own; a quarter point is a quarter point. What it does is sharpen a set of decisions that were easy to leave alone when borrowing was cheap: how much cash to hold, where to hold it, whether to carry a line balance, how hard to work the receivables, and what the covenants look like at year end. This guide works through each one for a $5M to $50M company, with a worked example, a paydown check for your own figures, and the year-end lender preparation. For the forecasting that sits underneath all of it, see our guide to the cash flow forecasting process.
What a higher rate changes
Three things, and they pull in different directions.
The line costs more. Most commercial lines of credit float at prime or SOFR plus a margin, so every increase flows straight into the interest on drawn balances. A company that carries the same balance month after month is paying more for the same working capital.
Idle cash costs more. Cash sitting in a non-interest checking account while the line is drawn means the company is borrowing at prime plus a margin to hold cash earning nothing. The gap between the two rates is a direct cost, and it is larger now than it was.
Covenant headroom narrows. Debt service coverage and fixed charge coverage put interest in the denominator. Higher interest on variable-rate debt reduces the ratio even when earnings are flat, which matters most in the fourth quarter, when the year-end compliance certificate is calculated.
The tension is that paying down the line to save interest also reduces the cash on hand, and the business still has to make payroll if a large customer pays late. The rest of this guide is about resolving that tension with numbers instead of instinct.
Sort the cash by purpose
The first step is to stop treating the bank balance as one number. Cash in an owner-led company does three jobs, and each job has its own target, its own home and its own rules.
Writing this down as a one-page treasury policy, with the target for each bucket, who owns it, where it is held and what happens when a balance moves outside its range, turns every large payment and every line draw from a fresh debate into a routine decision. It also answers the banker's questions before they are asked.
Size the buffer from your own numbers
The common starting point is three to six months of operating expenses, and it is only a starting point. The right reserve depends on how predictable revenue is, how concentrated the customers are, how stable the margin is, how reliable the credit line is, and when the large obligations fall. To size yours:
- List the fixed monthly obligations. Payroll, rent, insurance, debt service, software, and the vendors the business cannot operate without. This is the floor, and it is usually smaller than average monthly spending.
- Map the swings. Seasonal lows, project closeouts that slip, months with inventory builds or subcontractor peaks. The reserve has to cover the worst normal month, which the average hides.
- Add the lumpy items. Insurance renewals, estimated tax payments, bonuses, debt maturities, and the quarter when the large customer renews.
- Stress it. The largest customer pays 45 days late, revenue runs 10% under the forecast for a quarter, or expected financing slips two weeks. The reserve should cover the realistic downside, with the line as the backstop rather than the plan.
- Set a target and a trigger. A target balance, and the level at which finance tells the owner and the plan changes.
A professional services company with prompt billing and spread-out customers can run near the lower end. A project business with milestone billing, seasonal demand or a few large customers needs more. A 13-week cash forecast, updated weekly, is what turns the reserve from a guess into a number; it shows the weeks where headroom is thinnest, which is where the buffer is sized. Our post on spotting cash flow issues faster covers the early warnings.
Pay down the line or hold the cash?
This is the decision the rate increase sharpened most. The figures below are hypothetical and rounded. A distributor carries an average balance of $2.0M on a $3.0M line at prime plus one point, so 8.00% after the September move, which is about $160,000 a year in interest. The operating account holds $1.0M on average, against a buffer target of $400,000 set from the steps above. The surplus is $600,000.
| Choice for the $600,000 surplus | Annual effect | What you are left with |
|---|---|---|
| Leave it in checking | $0 | $1.0M of cash; $1.0M available on the line |
| Move it to a sweep at 3.5% (hypothetical rate) | +$21,000 earned | $1.0M of cash with next-day access; $1.0M available on the line |
| Pay down the line | +$48,000 of interest saved | $400K of cash; $1.6M available on the line, if redraw is automatic |
The arithmetic favors the paydown by $27,000 a year, and the arithmetic is the easy part. The paydown is right only if three things are true: the line can be redrawn without new paperwork, fees or lender discretion; the $400,000 buffer survives the stress test; and the agreement has no borrowing base or covenant that a lower cash balance would trip. If the agreement lets the bank reduce availability when results soften, the undrawn line is worth less than it looks, and some of the surplus belongs in the sweep instead. The answer is usually a mix, decided on the forecast, and revisited monthly. Run your own figures below.
Line paydown check
Enter your figures to see the surplus and what paying it down would save.
In our FP&A work the surplus is read off the 13-week forecast each week, so the paydown decision is made against the next quarter's low point rather than today's balance. Our post on funding the working capital a growth plan needs covers the longer-term question of whether the line balance is structural.
One more test. If the line carries roughly the same balance every month of the year, the business has a permanent working capital need rather than a timing need, and a revolving line is an expensive way to fund it. That is a conversation about term debt, customer terms, inventory, or in some cases equity, and it is worth having before the renewal rather than at it.
Shorten the cash conversion cycle
The cheapest liquidity is the cash already owed to you. The cash conversion cycle, days of inventory plus days to collect less days to pay, measures how long operating cash stays tied up, and every day taken out of it is cash the line does not have to fund. The levers are familiar; the discipline is in running them every week.
| Lever | What to do | What to watch |
|---|---|---|
| Invoice on completion | Bill when the work ships or the milestone is met rather than at month end. Automate the send. | Billing errors and vague milestones delay more collections than customer insolvency does. |
| Follow up on a schedule | Reminders at 7, 14 and 21 days past the invoice date, with a named owner and a call at 30. | Disputes raised late; one customer whose balance keeps aging. |
| Electronic payment | Offer ACH and card; move the largest customers off paper checks. | Card fees against the days saved. |
| Early-payment discount | Offer 1% for payment in 10 days to selected accounts that have the cash. | A 1% discount for 20 days is an expensive annual rate; use it where the alternative is the line. |
| Pay to terms | Pay suppliers on the due date, neither early nor late. Ask for net 45 or 60 at renewal where volume justifies it. | Supplier goodwill; an early-payment discount that beats your cost of capital is worth taking. |
| Inventory to demand | Reorder to the forecast; sell or return slow stock. | Months on hand by item. |
Our guide to managing working capital day to day covers each lever in depth. The point here is the link to the rate: with the line at 8%, every $100,000 collected 30 days sooner is worth about $660 a year in interest, and a company that takes ten days out of its collections on $15M of revenue frees roughly $400,000 of cash for good.
Watch the covenants before the lender does
Rising interest reaches the covenants through the denominator. Debt service coverage compares cash flow with principal and interest; fixed charge coverage adds leases and some capital spending. Higher interest on variable-rate debt lowers both ratios with no change in earnings, and the fourth quarter is when the year-end calculation is made. A company can have adequate cash and still get a difficult call from the bank if coverage is drifting toward the covenant level.
The preparation is the same package that makes a loan request go smoothly, run monthly rather than once a year: actuals, cash, the covenant calculations under the agreement's own definitions, and a forward view. Our post on what banks look for before lending covers the ratios and includes a coverage check. For year end specifically:
- Use the agreement's definitions. Permitted add-backs, measurement period, caps and exclusions vary. The generic formula is not the one that will be tested.
- Calculate trailing and forward. Where the ratios stand today, and where the forecast puts them at year end and at the next two test dates.
- Build the bridge. Show what moved the ratio from last quarter: revenue, margin, payroll, interest, one-time items. Lenders and directors read the bridge before the ratio.
- Stress the earnings. Revenue down 5% and 10%, collections slower, interest a quarter point higher. Know the headroom in dollars.
- Meet the reporting dates. A late certificate is a technical default and the first thing mentioned at renewal. Assign an owner and a calendar.
- Call the banker early. If the stress case gets close to the covenant, a conversation in November with a forecast and a plan is worth more than a waiver request in January.
In our FP&A engagements the covenant calculations sit at the bottom of the monthly forecast, so the owner sees the fourth-quarter number in August. One engagement runs the budget-to-actual results and an integrated cash view with the company's directors each month, which is what turns a lender review from an event into a routine. Our guide to improving financial reporting covers the package itself.
Common mistakes
- Treating the bank balance as one number. Operating cash, buffer and surplus have different jobs and different rules.
- Sizing the reserve from a rule of thumb. Three to six months is a starting point; the obligations and the stress case set the number.
- Paying down the line without reading the agreement. If redraws need approval, the undrawn line is not the backstop you think.
- Chasing yield with operating cash. A slightly higher rate is not worth a transfer cutoff on payroll day.
- Carrying the same line balance all year. That is a structural need funded with the most expensive instrument.
- Discovering the covenant at year end. The forward calculation belongs in the monthly package.
- Letting collections slip while watching rates. Ten days of collections is worth more than any sweep account.
Frequently asked questions
How much cash should a $5M to $50M company hold now?
Enough to cover the fixed monthly obligations through the worst normal month plus the lumpy items ahead, tested against a late payment from the largest customer and a soft quarter. Three to six months of operating expenses is the common starting point, with recurring-revenue businesses nearer the low end and seasonal or project businesses above it. Size it from your own 13-week forecast, with a target and a trigger.
Should surplus cash pay down the line of credit or stay in reserve?
Compare the rate on the line with what the bank pays on a sweep. With prime at 7.00%, paying down variable-rate debt usually saves more than cash earns, provided the line can be redrawn without new approvals or fees, the buffer still covers the stress case, and no borrowing base or covenant depends on the cash balance. If any of those fail, keep more in the sweep and revisit monthly.
How does a rate increase affect loan covenants?
Interest sits in the denominator of debt service coverage and fixed charge coverage, so higher interest on variable-rate debt lowers both ratios even when earnings are unchanged. The effect lands at the next test date, often year end. Calculate the ratios under the agreement's own definitions, trailing and forward, stress them for a further quarter point and softer revenue, and talk to the banker early if headroom is thin.
What should I ask my bank about sweep and money market accounts?
The rate after fees, the transfer cutoff times, whether funds return to the operating account automatically each morning, the minimum balance, how deposits above the insured limit are protected, and how quickly the full balance can be moved back in an emergency. A lower rate with same-day access and no manual transfers is often the better choice for the buffer; the surplus bucket can accept more restrictions.
Should I fix the rate on my debt?
That is a question for your banker, with the forecast in hand. Fixed-rate term debt, or a swap on a floating facility, trades a known cost for the chance rates fall. The answer depends on how long the balance will be outstanding, the covenant headroom, and what the business can absorb if rates rise again. A line balance that never goes away is the clearest case for fixing the rate.
How often should the cash forecast be updated?
Weekly for the 13-week view, with collections and payments reloaded each Monday and the surplus re-read against the next low point. Monthly for the longer forecast that carries the covenant calculations. A weekly rhythm takes an hour once the model is built, and it is the only way the buffer target, the paydown decision and the year-end covenant view stay current as rates and customers move.
Put the numbers behind the cash decisions
MyExec builds the 13-week cash forecast, the monthly covenant view and the treasury policy that make these decisions routine, staffed from analyst through CFO and tied to your close. If your line balance, your reserve or your year-end covenants are a question right now, a 30-minute call will show what we would build first.
Preparing a loan request or a renewal? Start with what banks look for before lending to your business.
