Savvy cash managers know that a line of credit is one of the best tools for dealing with cash flow volatility. You never want to be the business that's late on bills, salaries, or meeting other obligations because collections are slow. Having a line of credit open keeps that from happening.
A line of credit can actually help you save money as well. With today’s low interest rates, the opportunity to save by taking early payment discounts is greater than ever.
Many suppliers offer 1% discounts for early payment. The math is simple: if you take advantage of the discount to pay a month early throughout the course of a year, you earn the equivalent of an annual rate of 12% interest. As long as your cost of credit is less than 12%, you'll save money with this discount every time.
While it may seem illogical to borrow money in order to take a small discount, the numbers are actually quite compelling. Let’s say that you have a $100,000 invoice to pay and can save $1,000 by paying it 30 days early. Even if you have to borrow the entire amount of the invoice, your interest cost for the 30 days (assuming a 6% rate on your line of credit) would only be $500. Over the course of a year, these savings could turn into a nice addition to your bottom line.
The benefits of paying early can extend beyond immediate savings. As an early payer, you enhance your standing with your suppliers. Their appreciation can translate into better service, better pricing, and other concessions. And you could find yourself first in line when inventories are tight.
How a Line of Credit Benefits Suppliers Too
A line of credit also pays off from the other side of the table. A supplier offering a 1% discount to get paid 30 days early may want to reconsider the payment policy. Utilizing a low interest line of credit as needed can make more financial sense. There may be other good reasons to offer a discount, but it may also make sense to assess (and actually collect) interest on late payments.
Executing this strategy is easy with a line of credit sweep. Once approved, your line can be set up to advance cash to your business account automatically as needed. Likewise, excess balances in your account can automatically be swept to pay down the balance on the line as receivables are collected.
The process is completely automated. All you have to do is pay your bills, collect your receivables, and let all the sweep transactions occur seamlessly in the background. Lines are typically secured by accounts receivable or other collateral, so interest rates remain affordable. This illustrations shows how a sweep account works.
Business Bank of Texas offers line of credit sweeps to businesses of all kinds. One of our relationship officers will be happy to explain how this service can work for your business. You don’t have to come in to the bank; we'll come to you. Contact us by e-mail or phone. If you call us during business hours, you can count on talking to an actual human being who is happy to help.