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Close the Cash Gap with a Credit Line

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 and paid off promptly, it may be extended from year to year. Manufacturers often use a credit line to buy raw materials, then pay it off when the products are sold. Seasonal companies may use a credit line to cover expenses during slow months, and repay it when business picks up. Import/export firms might find a credit line convenient for managing the sometimes long wait times for payments or goods to arrive.

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 use a percentage of their accounts receivable or inventory as collateral. The loan agreement defines the amount of control the lender has over the collateral and cash proceeds.

Guaranty
Lenders also frequently demand that the business owner or a majority stockholder serve as the personal guarantor of a credit line. This helps ensure that the business treats the borrowed funds prudently.

What's Right for You?
Your business banker can help you review your company's borrowing needs to determine if a line of credit is the best financing option for you. Call to set up an appointment at 1-888-276-4426.

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