The advantage of having a seasonal line of credit is that the
funds are available when you most need them.
The funds can provide the extra cash needed for temporary
increases in inventory levels as sales increase. Increased sales
may result in higher accounts receivables, which will need to
be financed until they are collected.
The line also may be used to take advantage of
supplier discounts for bulk purchases during various
times of the year. A seasonal line can relieve the
pressure of those short-term cash needs allowing you
to continue to grow your business. All such savings
really can benefit your bottom line.
All types of business can have periods when they
see a clear and consistent increase in sales levels.
Accounting firms often collect the bulk of their
receivables after tax season. The line will fund
expenses through the second or third quarter of the
year. Once the billings are collected, the line can
then be repaid in full.
The purchase of holiday products by retailers or
the manufacture of seasonal items, like toys or snowmobiles,
would also benefit by having a seasonal line. In those
industries, the line proceeds are used to pay suppliers and
labor, or to create the inventory which is sold. When receivables
are collected, the bank is repaid, and the line is available
for the next season.
It would be nice if every business had well-defined and easily
tracked seasonal cash flow needs, but that is rarely the case.
A retailer can have several seasons that overlap, for example:
Easter sales, summer clothing sales, back-to-school and
Christmas sales. Careful planning and use of a line of credit
can help to ensure a business is not still paying for Easter
inventories while funding the build up for Christmas sales.
One way to determine the size of the seasonal line is for a
business to review the historical monthly balance sheet and
income and expense statements for the last 12 months or
longer. Attention should be paid to the month-to-month
changes in inventories and accounts receivable, which will
reflect the growth and contraction over time as a business
increases or declines.
On the liability side, focus should be put on accounts
payable because suppliers may be a source of short-term funding.
The monthly income and expense statements are useful,
as they reflect increasing and decreasing revenues and profit
or loss for the period, which also can impact cash. Using the
information to develop monthly cash flows will help
in identifying the peaks and valleys in a cash flow
A thorough understanding of supplier payment
terms for inventory will help to identify this potential
source of funding. It may be possible to sell and
collect a receivable prior to paying the suppliers. A
complete review may help in identifying overlapping
seasons when the peak need for cash may
extend into the early part of the next season. The
better understanding you have of those cycles, the
better prepared you will be to discuss the funding
needs with your bank.
Keep in mind, the borrower and the bank have
their greatest risk when inventory is at its peak and
the seasonal line is fully disbursed. A business
owner can assure the bank and suppliers by supporting the
line amount being requested with the historical patterns
developed in the monthly cash flows. Those statements should
reflect the conversion of inventory to cash.
If you are looking for more funding than historic numbers
support, you will need to explain your reasoning. Anticipating
higher sales volumes could be one reason, or a different product
mix might be another. The bank will be looking for the
underlying assumptions regarding those changes and the
impact they will have on the cash needs. The bank will need
to be comfortable that the higher sales volume or the change
in product mix is reasonable.
Inventory normally is the biggest risk to your bank, but
accounts receivable can be riskier at times. For example, a
lumberyard may have palletized lumber with a known commodity
value, while the receivables contain extended terms to
A distributor of chemicals may have less risk in warehoused
commodities than in its receivables. During peak times, you
may need to finance the buildup in your receivables. Inform
the bank of your credit policy and they may wish to discuss
that further. Your policy should include investigations, customer
credit limits, an aging of receivables, collection procedures
and whether you require guarantees and letters of credit.
The bank will want to know if these are well-established
relationships and how customers have paid in the past. If it
takes 90 days to collect receivables — when peers collect in
30 to 45 days — you should be able to explain why.
A seasonal loan often is advanced under an advised, revocable
line of credit sufficient to take care of the peak borrowing
need while granting some leeway for additional requirements
or timing differences. Typically, payments are interest
only on the amounts advanced, with the principal balance due
in full at the end of the season. Inventory rates will differ
greatly depending on the type of inventory and likely will be
25 percent to 50 percent of cost.
With accounts receivable, lending percentages will be
between 65 percent and 80 percent with accounts more than
90 days or more not being included.
If used as intended, the line will help smooth out the ups
and downs of the cash flow cycle associated with seasonal
activities allowing you to manage your business more efficiently
and creating the opportunity to grow.