Operating Loan/Lines of Credit
- Supplements your day-to-day cash flow needs with a line of credit that is accessible 24 hours a day through a variety of channels.
- Provides access to additional funds through your business deposit account with a credit line starting at $5,000 which provides you the financial flexibility to support your business growth
- Access these funds anywhere, and at anytime, through ABMs, Online and Telephone Banking, and through your Client Card at bank branches
- Reduces the effort required to manage your credit line by automatically checking your loan and deposit account balances every business day and paying down your line with any surplus funds
- Low monthly fee
- Automatic transfer of surplus deposit balances to your outstanding credit line
- Approvals are based on the personal credit worthiness of the applicants/owners of the business as well as that of the business
- Interest is to be covered through your regular deposits made to your Business Deposit Account. Minimum monthly deposits must cover the cost of the interest.
- The interest paid on your Business Operating Line is based on the Lending Bank’s Prime rate plus a premium depending on your credit history
If a business intends to borrow from a financial institution, chances are good that the borrowing will involve an operating line of credit. Under such an arrangement, the financial institution agrees to make available a specified amount, where the amount borrowed can fluctuate regularly within the limit depending on the company's cash flow.
Amount:
This varies of course, depending on your cash requirements (you have to show what your monthly cash requirements are via the submission of a monthly cash flow statement) and the security you are able to provide in support of the advances. Borrow only what you have to, but borrow enough so that you do not have to keep going "back to the well" for more.
Please note that it is also possible to borrow in US dollars from Canadian financial institutions. You would do so if you had regular significant accounts payable in US dollars along with a sufficient US dollar cash flow to pay the principal and interest. Borrowing in US dollars to pay US dollar accounts payable and subsequently using US dollar cash flow to repay the loans and interest, is called a "natural hedge" -- that is, using US cash flow to pay US dollar debt eliminates the Canadian/US dollar foreign exchange risk.
Purpose:
An operating line is most often used to finance working capital requirements. For a service firm, of course, you are selling a service and not a product. Consequently, normally there should be no need to purchase materials to produce the inventory which, in turn, can be converted into accounts receivable via the sale of these products. Thus, there should be less working capital requirements. What requirements there are would probably relate to salaries, office equipment, research and development, and business development expenses related to creating accounts receivable. If you are in a start-up situation with no accounts receivable, it will likely be difficult for you to obtain financing from a financial institution unless you have an acceptable personal credit rating and personal assets to support the advances.
Term:
A line of credit is normally a commitment for one year. Any funds borrowed under such an arrangement are considered to be short-term debt. Although this facility is repayable on demand, financial institutions must have well-founded reasons for demanding repayment before the facility comes to maturity.
Rate:
The rate tends to vary with the risk, the amount, and any ancillary business the financial institutions can pick up with the relationship. The cost of administering smaller loans means that it may take a financial institution some time to earn a profit on an account. Consequently, we suggest that rather than looking for the lowest rate, you ensure that you are dealing with an officer and a financial institution that provide competent, helpful and knowledgeable service.
Set-up fee:
There are different terms for this type of fee but such a fee, regardless of the name, is basically intended to defray some of the cost of establishing a relationship with you. Again, rather than looking for low or no fees, focus on the service and competence to be provided by the financial institution and its officers.
Security:
The security varies according to many factors, including the nature of your business, the financial strength of the firm and the owner, the number of years in operation, security available, etc. A SMB selling services will likely have to provide a personal guarantee if the accounts receivable are not extensive or strong enough for the financial institution to rely totally on them. In order to ensure that you can borrow against these accounts receivable, you should ensure that you enter into an enforceable contract with each of your clients and invoice them regularly according to the terms of the contract. If you do not do so, the financial institution will have no valid document against which it can advance the funds. When lending, a financial institution will typically take any unencumbered fixed assets as security. If you need the funds, you may not have much choice but to agree to give these extra assets as security. However, if you can avoid giving long-term assets to secure short-term borrowings, do so because it is best to secure short-term borrowings with short-term assets and long-term borrowings with long-term assets, that is, matching the term of the debt with the life of the assets.
Availability:
This term refers to the conditions under which the funds can be drawn down. In some cases involving larger transactions, some financial institutions will permit funds to be drawn down for fixed periods at fixed rates, all within the one-year limit of the loan. A cardinal rule that lenders tend to insist on, is that the funds outstanding neither be above the agreed amount of the loan ("over line"), or above the amount of security available to secure that loan ("under margin"). Calculations are typically done monthly to ensure that security is sufficient to cover all advances. A borrower can lose significant credibility if he/she permits the line of credit to go "over line" or "under margin" for any reasons within his/her control.
Pre-conditions:
These are the conditions which must be met before the financial institution advances any funds. The pre-conditions normally seek information related to the firm's financial position, legal status and security.
Other conditions:
There could be any number of special conditions relating to a particular loan or borrower.
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