With prices on the rise, many marketers report being forced to borrow more than ever on working capital lines of credit. If your company is not managing (paying down) that line daily, however, it’s highly likely you’re over-borrowing and paying excess interest. And the good news is, you don’t have to do this – your bank will!
To keep interest expense down, your working capital line should be paid off daily with any “spare” cash. In fact, any balance in your checking account at all should be used to pay down your line, and your staff shouldn’t have to lift a finger or touch a computer for that to happen. Instead, it should be an automatic bank function. Any money in your checking account at the end of the day should be automatically applied to your line of credit, and any shortfall in your checking account to cover checks and any EFT should be automatically advanced from your line.
Even if your favorite bank is small and technologically unsophisticated today, ask them to perform this process for you. Many Meridian clients have gone to their bankers and let them know they need this service with favorable results. Small banks want to keep your business. Even with regional banks, although this service is readily available, it’s not advertised. Why? It is more profitable for the bank for customers to leave their cash in non-interest-bearing checking accounts and not pay down their loans. The banks get use of customer money for free while those customers pay them for borrowed money they don’t need!
As you discuss automatic line management service with your banker, visit your interest rate basis. Most marketers have found LIBOR (London Interbank) based rates to be less costly than Prime based rates. A bank can price at as high as LIBOR plus 3.0% right now and still be at or even below Prime. It’s very unusual to see a bank quote “Prime minus 1%” which would be 3.25% today, but it’s very common to see “LIBOR + 2%,” which would be the same 3.25%! (The aversion to “Prime Minus” lending has its roots strongly embedded in the definition of “Prime Rate” — the rate extended to the bank’s best customers.)
If you are working with a small bank, they may not be accustomed to LIBOR lending rates, but when pushed, they will usually entertain the idea. Right now the Federal Funds Rate is only about 1.25%. Most any bank can access funds at this rate. A good way to think about the Federal Funds rate is like it’s the bank’s Cost of Goods Sold. (They still have operating costs to cover, so don’t expect them to lend to you at that rate.)
An accessible source of concise information on daily rates, including rate definitions, is the website www.bankrate.com. It lists most basis rates daily, shows the same rate 30 days and one year prior. By clicking on the rate description, for instance, “11th District Cost of Funds,” you will get a definition of that rate basis.
Even after you’ve secured a great rate, remember to ask your banker to manage your line daily, applying any checking account cash at day end to your line of credit.