Making borrowing decisions often isn’t straightforward. You need to know where your business is now and have a plan for where you want to take it to decide what type of financing best meets your needs.
Determining the right type of credit facility for your business’ needs requires careful consideration. With multiple financing options, you and your banker will want to think through your strategic borrowing objectives, as well as your requirements in terms of loan purpose, financing term, securitization, and hedging needs.
Matching the loan to the life of the asset
The first step in selecting the right type of financing is to consider the useful life of the asset being financed and then match it with the financing term. For example, when buying real estate for a manufacturing facility, its useful life could be several decades or longer. So, taking a 20-year amortizing commercial mortgage loan would be an obvious choice. But when buying a truck, a five-year loan would likely be optimal.
Businesses with ongoing but variable cash needs might benefit from a working capital line of credit. This type of credit facility is typically used to fund variable and short-term needs of a business such as inventory purchases, accounts receivable build-up, payroll, operating expenses, and other routine cash outlays. A working capital line assists a business in financing the timing gaps that occur between cash receipts and its cash payments. These lines are typically one year in maturity, require monthly interest payments, are secured by working assets (accounts receivable and inventory), and are paid down through the conversion of working assets back into cash, such as the collection of the business’ accounts receivable.
Sometimes, a guidance line of credit is the right path forward, as it can be used to finance both current and future needs. “Let’s say you know that you’ll need to purchase 20 trucks during the next year, but you only need five now,” says Lisa Fox, Commercial Debt Products Executive at Regions Bank. “You can secure financing for them all and draw down on the guidance line of credit as needed. A bank can underwrite the immediate credit request as well as preapprove funding for future needs.”
Other possible types of business credit include:
- Commercial cards, which can be an efficient way to manage staff business travel needs
- Automated Clearing House (ACH) line which can be used to pay employees through direct deposit, pay vendors, and receive customer payments
- Interest-rate swaps to protect borrowers from the risk of rising rates on a variable-rate term loan
“Offering a credit-worthy client the ability to hedge its floating rate debt against rising rates may prove beneficial. An interest rate swap can lock you in at a fixed rate for the duration of your loan in a period of rising rates,” Fox says. “It’s an attractive option if you want to hedge against rising rates. Maybe you took out a 15-year variable-rate loan five years ago when rates were low, but it may be risky to maintain exposure to variable rates as interest rates rise.”
For example, the Federal Reserve Bank’s benchmark federal funds rate stood just above zero percent from December 2008 through November 2015. The latest increase, in March 2018, brought the rate to between 1.5 and 1.75 percent, and the Fed has indicated the likelihood of two additional 0.25 percentage point hikes this year — with more to come in 2019. The median estimate for the 2019 federal funds rate is 2.9 percent by year’s end.
Making borrowing decisions often isn’t straightforward. There’s a lot to consider, especially in terms of the type of loan that best fits your business strategically. “You need to know where your business is now and have a plan for where you want to take it,” Fox says.
In addition to relationship managers who get to know the client’s business, Regions Bank’s industry and sector specialists can provide assistance. Learn how Regions Securities can help you make the right credit decisions for your business.
