The line of credit is a short-term loan usually used to support short-term assets that are illiquid. The assets thus financed are most often accounts receivable and inventories. Operation The line of credit is repayable on demand by the banking institution if you are in default of payment; for example, if you exceed the authorized limit or if the guarantees provided to the bank are no longer sufficient to cover the level of use. The authorized credit limit is established on the basis of the assessment of monthly cash or cash needs.

The cash flow forecast (or cash budget) is the most appropriate tool for assessing line of credit needs. This financial statement will be studied in the next chapter. As soon as your cash becomes negative, the banking institution automatically advances you the money necessary to bring everything back to positive. These advances are usually made in equal installments of $500, $1,000, etc., depending on the terms of the contract.

For example, if your bank account is in deficit by $200, then the bank will advance you $1,000 if advances are paid in $1,000 increments. This will give you a positive cash balance of $800. However, you will have to pay interest on the used line of credit of $1,000, even if you only needed $200 to cover your bank deficit.

Financing – Step 6 – Financial forecasts 72 Guarantees to be provided Usually, financial institutions allow the use of a margin equivalent to 75% of accounts receivable for 90 days or less. The bank may therefore ask you to provide it with the chronological list of your customer accounts each month or each quarter and will thus compare it with the amount of your margin used.

You will therefore need to have adequate bookkeeping to provide the requested documents within the required deadlines. Using accounting software will make your job easier. Depending on the nature of the stocks (ease of resale, perishable goods, speed of obsolescence, etc.), you can also give them as collateral.

The bank may also obtain the inventory as collateral against the use of your margin. The limit granted will mainly depend on the nature of the guarantees provided. For example, perishable or rapidly depreciating items are usually not considered valid warranty even if the institution includes them in its list!

If the company has temporary investments, you can provide them as collateral against 100% financing. For example, if the company holds a certificate of deposit for $25,000, it can obtain an equivalent credit limit. Finally, you may be called upon to provide personal guarantees to obtain financing.

If your business has surplus cash, you will have interest income (or interest income) which will be added to business income in the income statement. We will study how to calculate these surpluses at the cash stage.

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