Covenants
Clean-down
A clean-down requires the line to sit at or near zero for a short window each year. It is the test that proves a revolver funds swings rather than a permanent hole, and failing it changes what the facility is.
Also called clean down period · hard core borrowing · revolver clean-down · annual clean-down
A line that never clears is telling you something. What it is telling you depends on why.
| Cause | How it is read |
|---|---|
| Growth absorbing working capital | A good problem |
| The seasonal pattern has shifted | 28–50 on the scale |
| Capex funded from the revolver | 50–74 on the scale |
| A permanent operating deficit | Funding losses |
Why revolving facilities fail a clean-down, ranked by how seriously a lender reads each cause. Illustrative of practice; no clean-down window length or failure statistic is published and none is asserted.
What it is
A requirement that the revolving line sits at or near zero for a short window each year.
It is not a covenant in the financial-ratio sense and it does not test earnings. It tests the shape of your borrowing: whether the facility is doing the job it was documented to do.
The purpose is stated plainly: the clean-down is proof that the line funds swings rather than a permanent hole. A business whose need rises and falls will pass it without effort, because there is a point in the year when the money has come back in.
Why lenders require it
Because a revolving facility and a term loan are priced, sized and secured differently, and a permanently drawn revolver is a term loan that has been documented as something else.
The lender's exposure is not what the agreement says the facility is; it is what is outstanding. A line that never clears carries a permanent balance with none of the amortisation, maturity discipline or pricing that permanent debt would attract.
There is a credit dimension too. A business that has never repaid its working-capital line has not shown that it can. The clean-down is the only routine test in a facility agreement that requires a borrower to repay something.
A failed clean-down is rarely an acceleration. It is a reclassification, and the consequences follow from that.
| Outcome | How common |
|---|---|
| A question at the next review | Almost always |
| The line is resized | 22–48 on the scale |
| Term out the permanent portion | 44–70 on the scale |
| Formal waiver or default action | Rare |
What follows a failed clean-down, ranked by how often each is the actual outcome. Illustrative of practice; agreements differ in whether a clean-down failure is a breach at all.
What failing it reveals
That the facility is term debt wearing a working-capital label, and a lender will say so.
The published description is direct: a permanently drawn revolver has no headroom left for the swing it was built to absorb, it will fail the annual clean-down its agreement requires, and its lender will read it for what it is.
That second clause matters as much as the first. A facility sized for a swing and permanently drawn has nothing left for the swing. So the business has both mislabelled its debt and removed its own working-capital cushion, which is the position it was borrowing to avoid.
The economics reverse too. Hold a £4m need all year on a revolver and the interest bill reaches £270,000, the commitment fee falls away entirely, and the price argument for a revolver over a term loan disappears with it. A revolver's cost advantage exists only while part of it is undrawn.
Why lines fail
Four causes recur, and a lender reads them very differently.
Growth absorbing working capital is the most benign. A business selling more carries more in debtors and stock, and the line reflects that. It is a good problem, and the answer is usually a larger or differently shaped facility rather than a difficult conversation.
A shifted seasonal pattern is a sizing question. Where the trough has moved or shallowed, the clean-down window may simply be in the wrong month, which is negotiable.
Capital expenditure funded from the revolver is a structuring error. Long-lived assets should not sit on a working-capital line, and the fix is to term out or refinance that spending onto something matched to the asset.
A permanent operating deficit is the serious one. Where the line is funding losses rather than timing, the clean-down failure is a symptom and the facility is not the problem.
What happens when you fail
Usually a question, not an acceleration, and the answer you give shapes everything after it.
Agreements differ on whether a clean-down failure is a breach at all. In many it is an undertaking whose failure invites a discussion at the next review rather than triggering anything automatic. Where it is drafted as an event of default, that is worth knowing before signing rather than after.
The common outcomes are a resizing of the line to what does swing, or a condition on renewal that the permanent portion is termed out into an amortising facility. Both are reasonable responses to what the failure has revealed.
What makes it worse is a borrower who has clearly engineered a temporary clear-down by delaying supplier payments across the window. Lenders look at the pattern either side of the test, and a line that dips for a fortnight and returns immediately reads as an attempt to pass rather than as a swing.
The honest fix is to fund the permanent part permanently. Everything else manages the symptom.
| Response | How well it works |
|---|---|
| Time payments around the window | Visible to a lender |
| Improve cash conversion | 30–55 on the scale |
| Split into term plus a smaller RCF | 58–82 on the scale |
| Move to an asset-based facility | 72–96 on the scale |
Responses to a hard core of permanent borrowing on a revolving line, ranked by how well each addresses the underlying position. Illustrative of practice, not measured data.
The hard core
The portion of the line that never comes back, and naming it honestly is the start of fixing it.
Most businesses that fail a clean-down do not have a wholly permanent balance. They have a genuine swing sitting on top of a floor that has built up over years, often from a growth phase that was never refinanced.
The useful exercise is to look at the lowest balance in each of the last three years. That number is the hard core, and it is permanent funding whatever the facility is called.
Once it is named, the answer is usually straightforward: term out the core over a profile matched to what it funded, and keep a smaller revolver for the swing that remains. The total borrowing does not change. What changes is that the structure now matches the need, the clean-down becomes passable, and the revolver has headroom again.
Where an asset-based facility fits
Where the working-capital need has outgrown what a fixed line can sensibly cover.
A revolver is a fixed commitment sized once. A borrowing base is re-measured continuously and rises with the debtor book, so a business whose need grows with its sales is matched by it rather than constrained by it.
Clean-down requirements sit differently on such facilities, because availability is defined by the collateral rather than by a periodic proof of repayment. That is not an escape from discipline; the reporting burden is heavier and the eligibility rules do their own constraining.
It suits a business with a real and growing debtor book. It does not suit one whose line is permanently drawn because it is funding losses, and it should not be reached for as a way of avoiding a clean-down that is telling the truth.
What to negotiate
The window, the level, and whether failing it is a default.
On the window, the month matters. A clean-down set in your peak working-capital month is a test you will fail every year regardless of how well the business runs. The trough is the month to ask for, supported by three years of monthly balances showing where that trough sits.
On the level, at or near zero is the convention but the definition of near is worth agreeing. A requirement to reach an absolute zero on a facility with a small unavoidable float is harder than one expressed as a percentage of the commitment.
And on consequence, establish whether a failure is an event of default or an undertaking that prompts a conversation. Those are very different positions and the drafting is rarely raised at term-sheet stage.
None of these is usually contentious. They are simply not discussed unless a borrower raises them, and by the time the clean-down matters the facility is signed.
Common questions
What is a clean-down requirement?
A requirement that the revolving line sits at or near zero for a short window each year. It does not test earnings; it tests the shape of your borrowing, and it is proof that the facility funds swings rather than a permanent hole.
How long does the clean-down window last?
We publish no number of days, and the convention is described only as a short window each year. The specific length is a term of your agreement rather than a market standard, so read it rather than assuming, and note that the month it falls in matters more than its length.
Why do lenders ask for it?
Because a permanently drawn revolver is a term loan under another name, which carries a permanent balance with none of the amortisation, maturity discipline or pricing that permanent debt would attract. It is also the only routine test in a facility agreement that requires a borrower to repay something.
What happens if my line never reaches zero?
Usually a question at the next review rather than an acceleration. The common outcomes are a resizing of the line to what does swing, or a condition on renewal that the permanent portion is termed out. Whether it is a formal event of default depends on your drafting.
Does a permanently drawn revolver cost more?
The cost advantage disappears. Hold a £4m need all year and the interest reaches £270,000 while the commitment fee falls away entirely, so the price argument for a revolver over a term loan goes with it. A revolver is cheaper only while part of it is undrawn.
What is a hard core?
The portion of the line that never comes back. Look at the lowest balance in each of the last three years; that number is permanent funding whatever the facility is called. Naming it is the start of fixing it, and the fix is to term it out over a profile matched to what it funded.
Can I just pay it down for the test?
Lenders look at the pattern either side of the window. A line that dips for a fortnight and returns immediately reads as an attempt to pass rather than as a genuine swing, and it usually makes the conversation worse rather than avoiding it.
What should I negotiate before signing?
The month the window falls in, since a clean-down set in your peak working-capital month is a test you will fail every year. The definition of near zero, particularly if you carry an unavoidable float. And whether failing it is an event of default or an undertaking that prompts a discussion.
The full treatment sits in the guide: rcf vs term loan.
Related terms
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.