InsideBanking

what is a guidance line of credit

Lines of Credit

Line of Credit or Seasonal Line of Credit

A line of credit is provided for occasional or seasonal needs. It is usually provided to only the strongest borrowers who have established cash flow from operations and a clean credit history. An annual 30 day clean-up period, when the line of credit is paid off, is typically required. For small businesses, the main principals are required to provide personal guarantees. Pricing consists of a base rate (Prime, WSJ Prime, Libor, Other) plus some additional percentage. Prime Rate would be a typical rate for the strongest of borrowers. Guarantors have clean credit histories and a significant outside net worth. Cash flow from operations should be trending upwards and more than sufficient to support all debt obligations for the prior three years. Accounts receivable and inventory turnover is typically on par or better than their industry peer group and generally stable or trending positively. A line of credit may be secured or unsecured by assets of the business. If unsecured, then the guarantor usually has an extensive outside net worth. If secured, collateral usually includes account receivable, inventory (classified as working assets) and possibly a general lien on all business assets evidenced by a UCC filing.

Key Characteristics :

2) Occasional or seasonal needs,

Revolving Line of Credit

A revolving line of credit is typically used to support ongoing credit needs. Its primary source of repayment is conversion of working assets (accounts receivable and inventory). A borrowing base certificate is required for each advance and periodically (weekly, monthly or annually). Advances are based on a percentage of current accounts receivable (75% to 80% typically) There is no annual clean-up period. An annual clean-up period would typically result in a borrower default or the loss of the account. For small businesses, the main principals are required to provide personal guarantees. Pricing consists of a base rate (Prime, WSJ Prime, Libor, Other) plus some additional percentage points. Due to the additional monitoring required for revolving credit lines, pricing is typically 1 to 3 percentage points above the line of credit rate. Guarantors should have clean credit histories. Cash flow from operations is the secondary source of repayment and should be sufficient to support all debt obligations. Accounts receivable and inventory turnover should be on par or better than their

industry peer group and generally stable or trending positively. Collateral includes account receivable, inventory (classified as working assets) and possibly a general lien on all business assets evidenced by a UCC filing.

Key Characteristics :

1) No clean-up period,

2) Borrowing base certificate required with each advance,

3) Frequent and continuous needs,

5) Periodic Financial Statements,

6) Restrictive covenants,

7) Primary source of repayment - conversion of working assets, and

8) Secondary source of repayment - Cash flow from operations to be able to amortize a fully extended line of credit.

Asset Based Line of Credit

An asset-based line of credit is typically used to support ongoing credit needs. Its primary source of repayment is conversion of working assets (accounts receivable and inventory). A borrowing base certificate is required for each advance and periodically (weekly, monthly or annually). Advances are based on a percentage of current accounts receivable (75% to 80% typically) and possibly inventory, based on its liquidation value.There is no annual clean-up period. An annual clean-up period would typically result in a borrower default or the loss of the account. For small businesses, the main principals are required to provide a personal guarantee. Pricing consists of a base rate (Prime, WSJ Prime, Libor, Other) plus some additional percentage points. Due to the additional monitoring required for asset-based lines there is typically a monitoring charge that can cost several percentage points. Typically asset-based lines of credit have a form of collateral control: sweeps from depository accounts or lockbox collections. Collections are applied to reduce the outstanding balances.

Cash flow from operations is not typically a viable secondary source of repayment. Collateral includes account receivable, inventory (classified as working assets) and possible a general lien on all business assets evidenced by a UCC filing.

Key Characteristics :

1) No clean-up period,

2) Borrowing base certificate required with each advance, periodically (weekly),

3) Accounts receivable and accounts payable aging schedules (weekly, monthly, with each advance),

3) Frequent and continuous needs,

4) Growing company,

5) Collateral controls (lockbox)

6) Primary source of repayment - conversion of working assets,

7) Secondary source of repayment – liquidation of collateral or possibly no secondary repayment,

9) Periodic Financial Statements (monthly), and

Commercial Finance Line, Factoring Line

Source: www.insidebanking.net

Category: Credit

Similar articles: