How Can a Line of Credit be utilised?
Once a line of credit has been approved funds can be drawn down immediately. As soon as a part or full drawdown is made a pre agreed interest rate will be charged. In some cases lenders will make a charge against any unused balances. This charge is often referred to as a commitment fee. It will be less than the prevailing agreed interest rate.
A line of credit will have a pre-set limit. The borrower can drawdown up to the agreed limit. However, drawdowns may only reflect investment in different parts of the business. This will have been agreed with the lender and will be contained within the credit line contract.
Line of Credit Drawdowns
As with all businesses there are different sectors that need financing. There is expansion. This can mean anything from increasing the size of a factory to increasing imports. There is day to day running costs of the company. Increasing personnel. Diversification, as in moving away from the core business.
When a line of credit is offered the above is taken into consideration. Therefore, the line of credit will have a pre-agreed drawdown schedule. Drawdowns for expansion. Drawdowns for day to running costs. Drawdowns for increased imports, which means the lender offering bigger letter of credit lines.
This way, the lender is able to monitor the borrower. They can ensure they do not over-spend in one area. The lender may increase the line of credit if the borrower does overspend in one area. However, this is not a foregone conclusion and will probably involve in-depth negotiating. Lenders tend to appreciate if overspending is pre-advised and can advise the borrower accordingly.
As often is the case, borrowers do not have available security to fund a project. This they can do through leasing a Demand Bank Guarantee. This is a specific Bank Guarantee used for monetising purposes and is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758).
Once the lender has granted a line of credit against a Demand Bank Guarantee the drawdown may commence. However, there will be strict drawdown procedures in place. The borrower’s business plan will contain a drawdown schedule. These will range from initial capital expenditures, on-going raw material purchases to day to day running costs. These procedures will be mirrored in the line of credit agreement.
Lacking Security to Raise Finance?
This paragraph is aimed at all those companies who do not have the security to raise finance. You will have read above about a Demand Bank Guarantee. This can be leased at a fraction of the cost of the face value, please get in touch or visit IntaCapital Swiss to learn more…
Where can you obtain a Demand Bank Guarantee? Europe’s leading expert in Demand Bank Guarantees is IntaCapital Swiss SA Geneva. They have been providing access to Demand Bank Guarantees for over a decade. In turn this grants access to loans and lines of credit.