Clean-Up Requirement

Banks that have issued revolving lines of credit to small businesses are often worried about potential defaults from those business clients going belly up. One of the methods that some banks may utilize to mitigate their exposure is the Clean Up Requirement.

If the client defaults, or if they reach a percentage of their maximum line, like 90%, and it remains outstanding for more than a contractually agreed period of time, such as 120 days, the line can be frozen under the clean up requirement clause. This would stipulate an acceptable amount of repayment to replenish the credit line in order for it to be reactivated.

The notion behind this practice is to prevent companies with failing businesses from relying on the credit line as a means of permanent finance...instead of interim finance for factoring or miscellaneous, unexpected expenses.

Kind of like the Las Vegas casino that freezes out a player with mounting losses from a table before he gets wiped out and causes a scene that requires calling in the bouncers to remove him.