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Your Bank > Education and Advice > CNB University

How To Increase Seasonal LOC

B Belcher
Bernard Belcher is Vice President - Business Banking Portfolio Officer and can be reached at BBelcher@CNBank.com or (585) 394-4260 x36025.

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 cycle.

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 contractors.

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.