Exploring obtaining a line of credit from our bank, secured by cash. We will need to open a new savings account and hold xxx $ in that new account. Does this full amount now need to be treated as restricted cash or does that only become restricted to the extent we draw on the line?
LOC Secured by Cash
It's restricted cash. As long as you have the Line of Credit (I always think an LOC is letter of credit) you won't be able to touch the cash.
Remember the bank is giving you basically zero in interest, but is charging probably 6% or more. Why would you tie up your cash, just to re-borrow it?
Thanks Wayne - very helpful. The bank is giving us a very low rate (~3% per annum) and we figured out that we can continue to do our large purchasing on our cc, then take the cc cash back (> 1% per billing cycle) to more than cover the interest. *Should* increase float on purchasing.
OR negotiate a -10% to -15% if paid in cash with your suppliers. If you can get N30 same as cash...then you are 30 days ahead + the 10-15% discount. I am never one to make things complicated. Remember, that LOC also has fees. Also, I would only consider the secured LOC if my firm is building credit.
Consider the cost of cash (in the account) that you CANNOT use for more productive means. I don't think the bank will allow you to deposit the cash as you "use/consume" the LOC. If they grant you say a $100k secured LOC, you are required to have $100k in the account, whether you have used the LOC or not.
As a P.S., there is a saying...."Getting fried in your own oil."
This feedback is great. So while doing the LOC, I've been calling up all our suppliers to move them to terms. The issue is we're a smaller company with less of a history than other customers. They don't trouble themselves to make credit decisons - most punt over to their factors. Same conversation with them. If the factor is on the fence, we go back to the supplier to get them to apply some leverage from their end. Any other suggestions?
You are paying in cash. What history (credit) do they need? What credit decision do they have to decide on? It
Based on Emerson's "paying in cash", have them give you a cash discount as they won't or shouldn't have to pay the factor of their services (there are none).
Emerson/Wayne - you are both correct there is no credit decision when we do pay & ship. The discussion is about moving to terms. When we push for terms, many suppliers put us in touch with their factors. We do have discounts agreements in place, we want to keep those as much as we are able to *and* pay N30.
Why do these suppliers want to outsource their credit decisions / credit
The whole conversation with vendors/factors is like a "Who's On First?" scene from Abbott & Costello. Keep the tips coming please.
Factors won't lend on a/r unless they make the credit decision. If you want to make your own credit decision then the factor will charge higher rates.