What Is a Credit Cycle?
The theory of business cycles works on the idea that fluctuations between economic growth and economic slowdown are inevitable. The general idea is that growth becomes self-perpetuating: the more money people have to spend, the higher demand is; the higher demand is, the more people are needed to work; the more people are needed to work, the more money people have to spend. At some point, the supply of goods or services outweighs the demand. This causes the process to work in reverse, with falling demand leading to falling employment and wages, in turn lowering demand further.
The general theory of the credit cycle works in a similar way. In effect, the demand for goods and services from the business cycle is replaced by the demand for credit. When an economy is growing, there is more demand for credit as firms expand, which drives interest rates higher. At some point these interest rates, which are the price of credit, are too high for those who still want to borrow further. This means the interest rates begin falling, making it less profitable to lend money and less profitable to invest money in credit-based markets. This results in less money being available for lending, which winds up with credit being harder to come by.
The precise relationship between the business cycle and the credit cycle is disputed among economists. One theory, known as the Kiyotaki-Moore model, argues that the credit cycle amplifies the effects of the business cycle. This is based on the way that in many cases the amount of on-paper money which is dealt with by credit markets is much bigger than the actual amount of cash which passes back and forth between business and consumers in "real life." This magnifies the effects of any variations caused by the business cycle.
Another model is known as Minsky's Financial Instability Hypothesis. This says that the credit cycle means that as an economy grows, businesses find it easy and cheap to borrow. Eventually they accumulate such large amounts of debt into proportion to their profits that they can no longer take the risk of investing any further in capital expenditure. This causes a drop in demand for relevant services and products, such as construction, which can help cause the business cycle to go into a downswing.
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What is Bank Credit?
Because bank credit focuses on the borrowing capacity of the individual or business entity, the premise is a little different than the extension of a line of credit. First, bank credit has to do with loans that are taken out for specific purposes, rather than general purposes. Second, they often involve some sort of collateral that helps to ensure the repayment of the loan in the event of default.
A basic philosophy of the banking system is that when money is loaned out, there must be a reasonable expectation of repayment of the loan, plus interest. This means that looking at the overall financial status of the applicant is important. Assets such as property, savings and stock accounts, current indebtedness, employment status and annual net salary or wages, and overall credit rating are all components that factor into determining the bank credit of the applicant. This is a far more comprehensive approach than is normally used for the issuing of a credit card.
Understanding the importance of bank credit often becomes apparent when applying for a mortgage to finance the purchase of a new home. Depending on the overall financial health of the prospective homeowners, there may or may not be a sufficient level of bank credit to allow the approval of the mortgage. This may be true even if the applicant can demonstrate a steady source of income and is not in arrears on any current financial obligations.
There are some ways to improve a bank credit rating. First, look at credit card debt and eliminate it if at all possible. Also, cut down on the number of open credit card accounts. The combined worth of your lines of credit will impact your bank credit rating. Fewer credit cards means less potential to incur large balances that would hinder repayment of a loan or mortgage. Keep one or two credit cards and pay them off each payment cycle. This maintains a healthy credit record and will reflect favorably on your bank credit and will increase your borrowing power with your local financial institution.
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Advocat inks credit line
Advocat this afternoon announced it has a new $15 million, three-year revolving credit facility that replaces a bank revolver that would have expired in August.
The Brentwood-based company already has used $3.2 million of its new cash, which is secured by accounts receivable and to pay off an existing bank term loan. The new revolver is secured by accounts receivable and carries an interest rate of at least 6.5 percent or the bank's prime lending rate.
"As a result of changes in banking industry business practices since we entered into our previous credit facility in 2007, the new revolving credit facility has a higher interest rate than the existing credit facility," said CEO Will Council. "However, as a result of the significant reduction in our overall debt and the decrease in letters of credit required as a result of our improved debt level, the Company's interest expense is expected to decrease by approximately $200,000 during 2010 compared to 2009."
Shares of Advocat (Ticker: AVCA) rose 1.2 percent Wednesday to $6.70. They're down13 percent year to date.
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Personal Line of Credit
- Balance ups-and-downs between income and expenses
- Reduce your monthly payments when you consolidate higher-interest rate debt
- Be prepared for unplanned expenses now or in the future
- Enjoy funds for vacations, home improvements or large purchases
- No collateral required (no need to use your home or other assets as security)
- A renewable source of funds with no balance transfer or cash advance fees
- Access your available credit at any time and for whatever reason without reapplying
- Low minimum payments, but pay in full whenever you want to save interest costs
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Bank Credit Lines
Getting a Small Business Line of Credit
Need a bank credit line? Credit lines are designed to help your company meet day-to-day expenses during a cash flow crunch. We explain why you need a credit line from your bank and how you can get one.
Most small business owners rely upon their own resources to finance their business. These funds may come from a variety of sources including savings, family members, or even from retirement accounts.
While these sources of financing are fine for the start-up phase of a business, they cannot be relied on to meet your ongoing finance needs. For that, you are going to have uncover another reliable source of financing.
Bank credit lines exist to meet small business owners' short-term financing needs. Finding a credit line that's a good fit for your company might not be as difficult as you think. Here are some tips to help you get started:
1. Why do I need a credit line?
Before you start shopping for a credit line, it's important to ask yourself why you need financing. If you need financing to purchase equipment or other capital then a credit line is not the right solution.
Credit lines are designed to help your company meet day-to-day expenses during a cash flow crunch. In industries with uneven income cycles (e.g. agricultural industries), credit lines may also stabilize cash flow by providing interim financing. The repayment period on these loans is shorter than on capital loans because the lender expects the full amount can be repaid from normal business operations.
2. What about credit cards?
Technically, a credit card is a credit line. In recent years, some credit card providers have even marketed products specifically geared for small businesses.
However, unless your business only requires a very small amount financing, credit cards are usually the most expensive type of short-term borrowing available for a small business. Small business credit lines through a commercial bank or other lending institution are a more sensible (and affordable) alternative.
3. How do I secure a small business line of credit?
The place to start is the bank that you currently use for your business checking and investment accounts. By leveraging an existing relationship, you may be able to secure a better deal simply because your bank wants to keep your business.
Regardless of whether you use your current bank or some other commercial lender, there are certain requirements you will most likely be asked to meet. Obviously, the lender will want to take a look at the financial history of your company. Lenders are not likely to offer you a credit line loan for your business unless you are able to demonstrate a history (i.e. more than 2 years) of profitability. Be prepared to provide the lender with access to your company's financial records and tax returns.
The lender may also require co-signers (a.k.a guarantors) or collateral for your loan. Unsecured lines of credit are available for smaller loans, but larger loans are only going to be made in the form of secured financing.
