Revolving Credit and Other Aspects to Consider in Money Lending

in Finance

Revolving credit is better known as a ‘line of credit’ and it provides the borrowers with a sum of money which is paid back and then borrowing again when funds are required. In this type of funding the interest is only pad when the funds are used. The working process is more or less that same as the brokerage houses that extend margin credit to their customers based on the securities.

On the other hand, if there is any holder of a perpetual loan in revolving credit it is normally issued through a registered offering. In which the borrower only has to pay interest on the money borrowed. The most unique thing about this type of money lending is that the borrower decides as to when to retire the principal according to the convenient time.

  • The repayment schedules match the type of loan taken out by the borrower.
  • The type of loan obtained also affect the costs of the borrowing.

The payment terms are also unique as it may combine the principal amount and the interest on the loan at interest at regular intervals or paying the interests only with the principal repaid as a lone sum at the end of the loan contract.

  • However, in the first case the interest is charged based on only on the balance of principal remaining. This makes the portion of interest portion decline over time.
  • On the other hand, in a few specific types of leases, the lessor may slowly acquire the real estate or the particular product being leased.

In these special cases, the lease payments remain the same but the cost of the lessor decline over time. This is because the borrower is able to claim a part of the asset as depreciation alongside taxes.

Lender’s point of view

Considering the point of view of the lender, a borrower who is financially strong can invest much in a business that has a great stake in its success. The business may also have a long, steady and successful history of operations due to which it can offer adequate collateral.

In case it is a very small start-up that has a very brief history of moderate success will typically have a very weak bargaining position. It will have to make sure that it has a very strong case so that any potential money lender is assured and offers favorable terms.

In order to qualify for such a loan there are three main factors that will determine whether or not a small business is eligible to qualify for a loan. These are:

  • A good cash flow
  • A successful track record and
  • A favorable debt equity ratio.

In addition to that the business should have a carefully prepared and ordered set of documentation.

Net cash flow

The net cash flow also has a significant impact on the debt. This is ideally the first thing that the lender looks at first. This determines the cash flow of the loan applicant. This is because this is the only source of loan repayment. There are significant benefits of considering the net cash flow. These are:

  • It is different from the assets or profitability of the business and therefore helps the lenders to assess accurately the chances of loan repayment
  • It reveals the sales booked on the books as it appears immediately but the cash inflow due to it may be projected later especially when the payment of such sales is received
  • It also shows the amount of purchases made as costs but may need the cash to be paid to make such purchases later.

Based on these facts the lenders can initially find out the exact amount of cash available to meet with the present new debt conditions.

Ideally this amount should be at least 1.25 times the amount of debt service needed. In such a case the business will be considered to be at least at the ballpark to obtain such a loan. In order to be sure about the repayment of the loan the lender typically will consider the history of the cash flows of the business. This means that simply a cash flow history of two months is not enough to get the loan.

Ideally, the higher the cash flow ratio is and longer is the history, the more inclined the money lender will be to offer the loan. If the cash flow rate is lower, then you may rest assured that the battle is almost lost, at least certainly for now.

Documentation and its importance

Whether you are looking for a fresh loan or any relief for your earlier debts to come out of it soon at site such as at or any other, documentation is the most important thing to consider.

Documentation will not only tell about the favorable financial ratios of the company but it will also help the lender to have a look at the performance of the company over time. On the other hand, it will help the borrower to anticipate the loan proposal that should be provided to the lender to justify the loan. This proposal will constitute of different parts such as:

  • A business plan
  • The available financial statements
  • Details of other debts and liabilities.

Sometimes, there may be a few unfavorable ratios but that can be overcome if you have a consistent history that shows high growth of the business as well as a profitable performance all your through.

If you have more innovative plans that reflects high potential for success, it will carry more weight and make your chances of getting a loan higher.

The age of automation

The modern lending environment is actually the age of automation where computers and the internet have changed the role of the lending officers at financial organizations. One such automation is the LOS or the Loan Origination Software. This is the most commonly used software that is used by different banks, credit unions, and all other financing agencies. With the help of such software the money lenders can now evaluate the credibility in a much better way.

Image Credits: Sharon McCutcheon

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