Page 195 - Finance for Non-Financial Managers

Siciliano11.qxd 2/8/2003 7:28 AM Page 176
Finance for Non-Financial Managers
176
Use Short-Term Debt Only for Short-Term Needs
Business owners squeezed for cash to expand sometimes
make a big mistake. Because short-term financing is often easier
to get than long-term financing, they borrow short-term money, then
renew or stretch out their repayment, using the money to satisfy long-
term needs such as multi-year marketing programs, new product
development and introduction, and so on. If the long-term plans take
longer to bear fruit than they had expected, the businesses may be
strained for cash to repay short-term debt that can no longer be
delayed and their working capital can be badly damaged.
The key: use short-term debt for working capital that will generate
the funds to repay the loan in accordance with its terms and use long-
term debt to finance long lead-time projects for which the timing of a
return is uncertain.

its projected need for short-term cash and its available collateral.
The company then borrows—or draws against the line—as it
needs the cash and repays it when the need is gone. Thus, the
actual borrowing fluctuates over time and the cash advanced by
the bank revolves: in other words, it’s borrowed, repaid, and then
borrowed again, as the creditor’s cash needs change. The lender
will typically charge a variable rate for the amount outstanding
and may charge other

Revolving credit line An credit line fees as well.
agreement by a bank or Revolving credit lines
other lender to lend cash may be collateralized by
on demand up to a specified limit and liens on the company’s
then, as the borrower pays back all or assets, such as accounts
part of the loan, to allow the borrow- receivable, inventories,
er to borrow up to that limit again, as equipment, or property.
often as needed.Also known as a
revolver. Typically a lender will
extend credit up to 70% to
90% of eligible receivables
and perhaps 50% to 70% of eligible inventories. These credit
lines may also be unsecured for the financially strongest cus-
tomers of the lender. Most companies with short-term credit
needs will try to satisfy their needs by using revolving credit