business lines of credit

September 13, 2022

In this podcast, Andrew Marques, VP and Commercial Loan Officer at Cape Ann Savings Bank talks with John Maher about business lines of credit. They explore the ins and outs of this credit product for commercial borrowers.

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Podcast transcription

Transcription Disclosure: Below is a transcript of the conversation between John Maher and Andrew Marques. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with Andrew Marques, VP and Commercial Loan Officer at Cape Ann Savings Bank. Today, we're talking about business lines of credit. Welcome, Andrew.

Andrew Marques: Thanks, John.

What Is a Business Line of Credit?

John: Sure. So, Andrew, what is a business line of credit?

Andrew: It's a great question. A business line of credit is a revolving credit facility that can be borrowed, repaid, and re-borrowed as needed. It could be used for operations or for seasonal business.

Uses of a Business Line of Credit

John: Explain that a little bit more. What are business lines of credit typically used for? What are some examples?

Andrew: Yeah. It's designed to bridge a funding gap in any given business cycle. For example, it may be used for production expenses or buying raw materials in inventory or operating expenses. It's typically driven by a business' balance sheet and often uses business assets as collateral. And it's often used, as I mentioned before, for that funding of a business cycle.

Differences Between Loans and Lines of Credit

John: And is a business line of credit better than a loan, or what's the difference?

Andrew: There are different benefits to each one. It really is derived from what you're looking to do and what you need the funding for. A line of credit is used for short-term needs, where a business loan would be used for more permanent or long-term needs in the business.

Can Businesses Have Multiple Lines of Credit?

John: And can you take out multiple lines of credit?

Andrew: Generally, it would depend on the business and the person and the use. A business would not generally have multiple lines of credit. A business affiliate might be owned by the same business or individual, and they might have different lines of credit for the different business operations.

If there was a higher need or more of a need for that business line of credit, then we could look at increasing the max availability of that line. Generally, it comes down to discussion with the business owners and the operators of that organization to really determine what they need, and having a suite of business products available to them.

An instance of multiple lines of credit might be a small overdraft protection that's tied to the operating account. It would just cover any shortfalls in writing a check or bridging short-term gaps in that sense. And you could have a larger operating line of credit that would be more used in the day-to-day operations of inventory purchases, operating expenses, or seasonality of that business.

John: So there's almost maybe an accounting reason why you might have multiple lines of credit, because you want to keep these accounts or these lines of credit separate for this aspect of your business and this aspect of your business over here, and that might be the reason why you might want multiple ones. But generally, you're talking about a single line of credit.

Andrew: Right.

Is a Loan or Line of Credit Better for Inventory Financing?

John: So which one is better for inventory financing, a loan or a line of credit?

Andrew: That's a great question, and it really depends on the type of inventory. If this is just part of regular operations and you have historical needs, you might look at using that line of credit to fund a gap. Maybe one of your vendors shortened up their requirement for payment, so they're looking for payment faster than you might be receiving that income from the inventory or the products or the operations that you're using that line of credit for.

Or if you're looking to grow your inventory, expand your operations or your inventory base, you might look at doing a term loan as a permanent increase to that balance sheet, because you're going to increase the amount of inventory on that balance sheet. You'd want to pay that off through future cash flow, and a term loan would be a great facility to do that without having to revolve that line of credit down.

Because ultimately, we want to see a line of credit be used and repaid and re-borrowed, and not become what we bankers call an evergreen line of credit. And if there was an evergreen line of credit, meaning the balance never came down, like leaves falling off a tree, we could maybe term that out, because there might be something more permanent that had been used for the line of credit and it's not revolving and being used as part of the business cycle.

How to Decide Between a Business Loan or Line of Credit

John: So what's the best way of figuring that out? Should a company figure out which one works best for them and then approach you at the bank, or is it best to talk to you guys first, and you guys can help the company to figure out whether a loan or a line of credit is the best way to go?

Andrew: Yeah. There's really two ways to look at it. We're here as a resource, and we want to open up that conversation and be available. You may already know what you need through talking to an advisor or board of directors or an accountant, and they might suggest pursuing a line of credit. Or if you're just not really sure, that's really what we're here to do.

We get to know the business owners. We get to know the business operations, and we can help advise them in terms of the best loan product to meet their financing needs. So they don't have to know what they're looking for. If they see a need for financing, it's great to reach out to the bank or set up a meeting, and we can always discuss what they're looking for and how we can best meet that need.

Steps for Securing a Business Line of Credit

John: Okay. What are the steps in securing a business line of credit?

Andrew: I would start with that initial conversation, and then ultimately, it would be a submission of an application package. That generally includes historical financial information, tax returns or CPA-prepared financial statements, current debt schedule, balance sheet. It really depends on the size and the purpose of the line, so we would look at historical operations and go from there in terms of getting that application package together.

Repayment Terms for Business Line of Credit

John: Okay. And you mentioned before that generally with a business line of credit, you're looking for a company to use it and then pay it off, use it again when they need it, pay it off. Is there a period for paying back a business line of credit that a company should keep in mind?

Andrew: Again, it depends on the terms of that line of credit. We can provide seasonal lines of credit, which are exactly that. We'd look for pay down to zero during that company's busiest season where they might be collecting the most revenue, which is very typical in our area.

We have some seasonal businesses, whether it's a landscaping company that might do less in the winter time but they need to ramp up for the summer, or more seasonal hotels, hospitality-driven industry, things like that. We also have some seasonal fisheries here that they may need to pay for expenses upfront, and then they can pay that back as they're out fishing or operating in their busy season.

That, generally, on a seasonal line of credit would have a pay down period, where we'd expect the line to be paid down to zero when they don't need the money, and then it can be drawn back up during their off season. And then on an operating line of credit, we generally look at the history and the needs of the business and determine if the line's being revolved and used properly, but that can depend largely on any given year of operations, so that's not as clear cut. It's generally a look at the use of the line of credit over time, and if it's been used appropriately in accordance with the underlying assets on their balance sheet.

Benefits of Business Lines of Credit

John: Okay. Any final thoughts on business lines of credit and why they might be good for a company to use?

Andrew: Yeah, it really is. If you see a funding gap in your general business cycle, a line of credit is a great way to fill that in. The simplest case study would be manufacturing or buying inventory. They go through the production process. They turn raw materials into an end product. That business cycle, whether it's a few days or a few months, they're paying for those materials up front and then ultimately, selling those to buyers and replacing the inventory, earning income, and paying that down.

Generally, they're used to provide a bridge in a funding gap, and it can vary. Every business and every industry has different business cycles. They can be days, months, years in some cases, so it's often business-driven. But we always welcome those conversations and look forward to getting to know the business and the owners and their needs, and see where a line of credit might fit into the whole business banking package that we could offer them.

Contact Cape Ann Savings Bank to Learn More

John: All right. Well, that's really great information, Andrew. Thanks again for speaking with me today.

Andrew: Yeah, it was great. Thanks for the opportunity. John: And for more information on business loans, visit the website at capeannsavings.bank. Cape Ann Savings Bank, Member FDIC, Member DIF, Equal Housing Lender.