Lesson 1 of 6 · 13 min
Short-term bank funding: credit lines, secured loans and factoring
Bank credit lines differ mainly in how firmly the bank promises to lend: the stronger the promise, the more reliable the funding and the more it costs the borrower in fees and covenants.
In short
- Companies borrow short term to cover the cash conversion cycle, keep a liquidity cushion and take supplier discounts.
- Uncommitted lines: cheapest and most flexible, interest only on what is drawn, but the bank can refuse to lend, so they are the least reliable.
- Committed (regular) lines: a written promise, usually for 364 days, unsecured and prepayable, with a commitment fee on the full or unused amount.
- Revolvers are multiyear commitments with covenants: the most reliable bank funding.
- Secured (asset-based) loans pledge assets such as receivables or inventory. With assignment the firm still collects its receivables; with factoring it sells them at a discount and the factor collects.
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