Skip to main content
_FB_2018-Icons-finalized-cleaned-up_new_FB_2018-Icons-finalized-cleaned-up_newGroup 9
Back
Scroll to top

Financing Your Operating Cycle


John Harrington's headshotLast month we looked at how best to use a commercial line of credit. In that article, First Bank’s John Harrington, Western Region Senior Credit Analyst, showed us why using it to pay for working capital is the most efficient and easiest way to manage cash. This month, he provides a real world example of this strategy in action.

The ready objection to working capital financing is obvious: “But it’ll cost more interest! Why use debt to pay for things when cash is sitting in the bank account?” While true technically, there is an argument to be made that this structure is much easier to manage. But more importantly, the true value of working capital financing comes in the form of opportunity cost. By using cash to fund the operating cycle, companies are forced to pass on more valuable options to invest their cash into.

Here is a real world example

A business client has a $500,000 commercial line of credit (LOC) that is used for working capital purposes. The balance rises when the company is busy, and reduces, sometimes to $0, when it is slow. The loan had a high balance of $424,000 and also spent almost a month at $0. Over the course of the year, the average balance was $218,000. At a 5% interest rate, this results in total interest expense for the year of $10,900.

In this situation, working capital financing pulled hundreds of thousands of dollars out of the operating cycle and onto the balance sheet. Now, say the company in our example need to buy $350,000 in equipment. They have two options: the cash that was available thanks to the LOC or yet another loan. A $350,000 equipment loan at 4.5% interest, less than the rate on the LOC, would have accrued $14,443.62 in interest in the first year alone, resulting in higher interest expense of more than $3,500.

In this comparison, it’s easy to see that using the LOC for working capital frees up a greater percentage of cash. In turn, the cash can be invested more wisely in things like higher ROI assets without the need to get additional financing. The ability to use your cash like this often provides sufficient interest savings to cover the cost of the LOC balances and ultimately allows for greater strategic freedom.

Ready to explore your business loan options or additional avenues for business savings? Your local business banker is ready to help you find the best solution and tailor it to the needs of your company. Stop by or give them a call today.

Trending Topics

Get the Best Checking Accounts from First Bank in Wilmington, NC

If you are looking for some of the best checking accounts in Wilmington, NC, you are in the right place. With several convenient locations in Wilmington, each offering six types of checking accounts,...

Realize Your Dream with a Competitive New Business Loan – Asheville, NC

First Bank is the lender of choice for many borrowers in Asheville, North Carolina. A new business loan can allow you to pay for startup costs such as equipment, supplies, vehicles or inventory. Businesses Loans and...

Checking Account Comparison – South Carolina

With over 75 banks located in the state of South Carolina, checking account comparison can be overwhelming. If you live in South Carolina and are looking at opening a checking account, consider stopping in...

First Bank One Rewards Program: Learn More

There are a lot of advantages to being a First Bank debit or credit card holder, but the First Bank One Rewards Program is the most beneficial to you. By simply using your First Bank Debit, Platinum or World...

Bank Owned Homes – Find Bank Owned Homes for Sale in Your Area

If you’re in the market for a great deal on a home, a bank-owned home could be just the thing for you! With First Bank, you can easily search through a list of our bank-owned properties for sale. Bank-owned...

Small Business Startup Loans in North Carolina

If you have a good idea and a little bit of business savvy, a small business startup loan can serve as the cornerstone to your fortune. Whether it’s a traditional business loan, credit line, commercial mortgage,...

Loans in Salisbury, NC

Whether you’re planning a home improvement project or buying a used car, taking out a personal bank loan can be beneficial to help you finance your big purchase. The First Bank Salisbury, North Carolina location is...

The Benefits of Checking Accounts with Online Access

Out of all the factors that tend to influence our decisions regarding financial management, levels of convenience tend to play a heavier role than others. For that reason, online tools, such as access to checking accounts...

What are 30-Year Mortgage Rates?

If you are thinking about buying a home, you may be asking the question, “What are 30-year mortgage rates?” There are many ways to figure out the current average 30-year mortgage rates, but the best way to find...

Commercial Mortgage – Wilmington NC

First Bank’s commercial mortgage lenders can put you in the right location for your Wilmington, NC, business to succeed. Our commercial real-estate loan specialists will offer you more than just a competitive...