Credit line management

Today, many companies are focusing
on cultivating close relationships
with their clients to enable them to offer a “total solution” approach.

Some smart banks are following this
lead, and this includes the area of credit
line management. A bank’s close relationship with a client is key to its ability to
respond appropriately, such as increasing a
line of credit at an opportune time, says
John Sassaris, vice president of MB
Financial Bank.

Smart Business spoke with Sassaris
about what a working capital line of credit
is and what a company should look for in a
lender offering such a product.

What is your definition of a working capital
line of credit?

It’s a vehicle that allows a company to
fund its short-term cash flow needs. Cash
flow needs arise during the course of operations, and oftentimes an entity’s receivable collections do not match up well with
the demand for cash. That is when a revolving or working capital line of credit is used
to help bridge this gap. Over time, as companies achieve profits and retain those
profits within their balance sheet, the need
to draw on a line of credit for working capital diminishes. The company, in essence,
is generating its own working capital based
on these long-term actions. However, it is
still prudent to maintain a line of credit as
it can be used to handle seasonal cash flow
issues and take advantage of buying opportunities.

How does credit line management differ
today than in the past?

I think, generally speaking, companies
use their lines of credit in the same manner
they always have. However, today, the
global economy dictates a different cash
flow cycle. Whereas 25 years ago, manufacturing was generally confined to domestic operations, today, most products are
manufactured overseas. This has created a
kind of extended cash flow cycle as often-times you are paying for product while it is
still in transit. Maintaining an appropriate
level of credit is important, as oftentimes
you are dealing with the unexpected.
Further compounding this issue is that
these supplier relationships are often new,
and domestic entities are likely not granted
much of a credit line from the overseas
manufacturers. This eliminates what is
essentially the cheapest form of financing
for clients, as they do not have the ability to
take advantage of terms from their suppliers. That is why communication between
the company and the bank is critical, so
that you can address these types of issues
before they become problems.

What happens if you have too much credit
and use too little or vice versa?

From the bank’s perspective, if we commit too high a number and it is not being
used, it is actually costing us money. So we
attempt to meet the customer’s request, while taking the actual anticipated use into
consideration. Ultimately, we review the
matter annually, and after the relationship
has seasoned, we can determine the appropriate level.

On the flip side, from our clients’ standpoint, I think the line should always have
room to accommodate unexpected events
within their daily operations. Essentially, it
goes back to managing the cash flow cycle
and anticipating the unexpected. If a
receivable doesn’t get collected or if a
machine goes down, you need flexibility on
your line to allow you to react quickly to
such matters.

How does a bank determine how much credit to give a company?

For new relationships, we rely heavily on
the expectations that the prospect has for
the future and how those relate to its past
performance. Once it is a seasoned relationship, we really look to the historical
movement on the line of credit and the corresponding cash flow cycle. If there is a history of payments and draws on the line, it
generally means that the company is using
the line appropriately. We may increase or
decrease the line depending on the client’s
future need.

JOHN SASSARIS is vice president of MB Financial Bank. Reach
him at (847) 653-1848 or [email protected].