For many businesses, cash flow can be problematic. You may be caught between paying suppliers and awaiting payment from customers. A credit line could be just the lifesaver you need. Used wisely, a credit line can help a company bridge the gaps across the peaks and valleys of its cash flow and even help it grow.
Filling Short-Term Needs
A credit line is usually intended for short-term financing of up to a year. If it has been used prudently, it may be extended from year to year. Manufacturers often use a credit line to buy raw materials, and then pay it off when the products are sold In addition, they may find it convenient for managing the sometimes long wait times for payments or for goods to arrive. Seasonal companies may use a credit line to cover expenses during slow months, and repay it when business picks up.
Credit lines can also help finance growth. You might need a cash boost in order to accept that one big order that’s going to put your company in a different league.
How It Works
Structure – Credit lines are set up along the lines of consumer credit cards. A credit limit is established, and you can draw against that limit. As the money is repaid, it becomes available for you to borrow again, as many times as needed. However, there may also be a “cleanup” provision that requires you to pay off the balance or pay it down to a certain level for 30 days or more at some point, to ensure the credit line isn’t being used for long-term needs.
Interest – The interest rate on a credit line is usually variable, and tied to prevailing interest rates through the prime rate or some other standard. When interest rates rise, the cost of a credit line goes up.
Collateral – Most credit lines must be secured by collateral. Often, companies pledge their accounts receivable and inventory as collateral. Also, other assets such as equipment and real estate are used in conjunction or separately to secure financing.
What’s Right for You?
Your Horizon Bank Business Banker or Commercial Lender can help you review your company’s borrowing needs to determine if a line of credit is the best financing option for you. Click here to have a Horizon Bank Loan Expert contact you.