A commercial line of credit, also known as a revolving line of credit, can be a valuable tool for businesses looking to manage cash flow and support growth. Businesses have different cash needs: a contractor uses a line of credit to fund materials needed for specific jobs; a retail shop may use it to fund inventory purchases; and a seasonal business might rely on it to cover operating costs during their off-season.
A line of credit helps support short-term “working assets” like Accounts Receivable and Inventory. When properly used, a line of credit will provide a temporary source of cash until short-term assets are converted into cash. This converted cash, in turn, pays down the line for future use.
For example, Mary owns a dress shop in town and is struggling with purchasing new inventory when her cash flow cycle is low. With a line of credit, Mary can purchase fall inventory during the summer and have these fall products on display as the seasons turn. Revenue generated by sales of the fall products can be used to pay down the line, so it is available to draw on again when spring and summer inventory is needed.
Lines of credit can be secured by business assets like equipment, furniture and fixtures, inventory, accounts receivable or real estate. Borrowers are required to make monthly, interest-only payments on the outstanding principal balance.
Line holders can pay down the principal balance on the line at any time, in multiple payments over several months or in one lump sum. Most banks require the line of credit balance to “rest” at a zero balance for a minimum of thirty days each year. A typical interest rate for lines of credit is based on the Wall Street Journal Prime Rate (WSJP), plus a lender-determined spread, and are adjusted monthly as the prime rate changes.
Not every business needs a line of credit, but if your business toolbox doesn’t have one, it may be worth discussing the benefits with a commercial loan officer. To explore how a line of credit could support your business,
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