Business and Finance News

In past discussions, we have focused heavily on obtaining a business line of credit, securing the credit facility, and the pros and cons of using this type of financial instrument. In this article, we will focus on how the terms of revolving credit facilities are often structured. As we have discussed earlier, the mechanics behind the usage of a business line of credit are pretty straightforward. Much like a credit card, a business LOC allows you the flexibility of drawing down a principal balance, paying the interest owned on a monthly basis, and the ability to payback the principal and use it again at a later time. Primarily, this article will focus on what happens when a credit line comes to the end of its term. Again, the typical time frame for a business line of credit can range anywhere from three to ten years (with the average line having a lifetime of five to ten years).

When the credit line is about to expire, one of three things can happen. First, you can apply to have the credit line’s life extended. If your business is doing well and if you are producing enough positive cash flow then more likely than not you financial institution will extend the credit facility for an additional number of years. Again, it is important to remember that banks are in the business of lending money, and if you have developed a solid history of responsible usage of your business LOC then there is very little reason for a bank to discontinue the line.

The second thing that can happen is that the line closes. This scenario will trigger one of two events. The first scenario is that any outstanding principal balance will be converted into a normal business loan, and will is to repaid over a specified period of time. This arrangement is typically within the business line of credit contract that you received when you initially applied and were accepted for the credit facility.

The more unlikely event is that any outstanding principal balance will be due immediately upon the closing of the credit line. Again, this will be discussed and placed within your borrowing contract at the onset of the credit facility. If this is the case then you should plan accordingly for when this day comes as any drawn down principal will need to be repaid immediately.

Although it sounds like we are now beating a dead horse, your accountant should be involved with the management of your cash flow. They will assist in ensuring that any of the three scenarios will be handled appropriately and will have minimal if no impact on your business.