How to Use Revolving Credit for Liquidity Planning

Revolving credit is a flexible financing tool that allows businesses to borrow, repay, and borrow again up to a set limit, making it ideal for managing short-term cash flow needs. Unlike term loans, you only pay interest on the amount used, and funds are continuously available as you repay. Here's how it works and how businesses can use it effectively:

What It’s Best For: Day-to-day expenses, seasonal cash flow gaps, and working capital needs.
Key Features:
- Borrow and repay repeatedly within a credit limit.
- Pay interest only on the amount used.
- Flexible repayment terms.
Comparison: Term loans are better for fixed, long-term investments, while revolving credit suits ongoing or fluctuating needs.

Quick Comparison

Feature	Revolving Credit	Term Loan
Access to Funds	Continuous (up to limit)	One-time lump sum
Interest Charges	Only on amount used	Entire principal
Repayment Terms	Flexible	Fixed installments
Best Used For	Working capital, short-term needs	Long-term investments
Typical Duration	Ongoing, renewed annually	Fixed term (2–10 years)

To maximize its benefits, businesses should forecast cash flow, maintain low utilization (under 30%), and align credit usage with operational cycles. Pairing revolving credit with tools like cash flow forecasting software ensures better liquidity management and cost control.

How Revolving Credit Functions

Understanding the basics of liquidity planning includes knowing how revolving credit works and what sets it apart.

Comparing Revolving Credit and Term Loans

Revolving credit and term loans are designed for different purposes. While a term loan gives you a lump sum with a fixed repayment schedule, revolving credit allows you to borrow, repay, and borrow again as needed, up to a set limit. This flexibility makes revolving credit a go-to option for managing daily cash flow.

Feature	Revolving Credit	Term Loan
Access to Funds	Continuous access up to credit limit	One-time lump sum
Interest Charges	Only on the amount used	Charged on the entire principal
Repayment Terms	Flexible with minimum payments	Fixed monthly installments
Best Used For	Working capital, seasonal needs	Long-term investments, equipment
Typical Duration	Ongoing, often renewed annually	Fixed term (2–10 years)

Let’s break down the key terms and conditions that impact how revolving credit is used.

Standard Terms and Requirements

Revolving credit lines come with specific terms that can influence your financial strategy.

Interest rates for business revolving credit often follow a tiered system. Here are some important factors to keep in mind:

Credit Limits and Utilization: Limits are determined by factors like revenue, credit history, and cash flow. Keeping utilization below 30% is generally recommended to maintain strong credit scores.
Fee Structure: Common fees include:
- Cash advance fees: Typically 5% of the advance amount, with a minimum charge of $10.

"Revolving credit is a good indicator of credit risk and has the potential to impact an individual's credit score considerably", explains financial analyst Daisy Denehy.

Secured revolving credit lines require collateral, which usually results in lower interest rates. On the other hand, unsecured lines provide more flexibility but come with higher rates to compensate for the added risk to lenders. When crafting liquidity strategies, businesses should carefully evaluate these options based on their financial goals and requirements.

Knowing these details is key to effectively using revolving credit as part of a broader liquidity plan.

Evaluating Your Liquidity Requirements

Knowing your business's liquidity needs is key to making the most of revolving credit. By carefully examining your cash flow and financial goals, you can determine if this type of credit fits your strategy.

Steps for Cash Flow Analysis

Take a close look at your cash flow to uncover potential opportunities and risks in managing liquidity.

Start with Net Income Assessment
Review your revenue and expense timing to establish a clear picture of your baseline cash position.
Identify Seasonal Patterns
Monitor how cash flow changes seasonally to pinpoint when you’ll need the most working capital.
Analyze Historical Data
Look at past financial statements to spot trends and better predict future liquidity needs.

This process helps you figure out the right credit limit for your business.

Calculating Required Credit Limits

Finding the right credit limit means balancing easy access to funds with keeping costs under control. For instance, one company calculated a $70 million requirement by syncing credit with their peak working capital needs.

Factors to consider when setting your credit limit:

Align with your credit management standards
Check your debt-to-income ratio
Factor in seasonal cash flow changes and include a contingency buffer

"As the popular saying goes, 'cash is king.' Having enough cash to pay the bills, purchase assets, and keep the business running profitably is crucial for a company's long-term success." – Laura Roden, LendingTree

Keep in mind that holding extra liquidity isn’t free - it typically costs about 0.5% on undrawn portions of your revolving credit. Striking the right balance between having accessible funds and managing these costs is critical for effective liquidity management.

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Adding Revolving Credit to Your Finance Plan

Incorporating revolving credit into your financial strategy can help manage costs effectively while offering flexibility for growth.

Rules for Drawing and Repaying Funds

Making smart decisions about when to draw and repay funds can reduce interest expenses and improve cash flow management. Align your credit usage with your business's cash flow and operational cycles, especially during high-demand periods like inventory build-up.

Timing	Draw Triggers	Repayment Triggers
Short-term	Inventory build-up, Seasonal demands	After sales collections
Medium-term	Growth initiatives, Capital expenses	Operating cash flow surplus
Emergency	Unexpected opportunities, Disruptions	Return to normal operations

Tracking Credit Usage

Data from Q3 2022 highlights a stark contrast in credit utilization: businesses with excellent credit scores average a 6.5% utilization rate, while those with poor scores hover around 82.1%.

Here’s how to keep your credit usage in check:

Calculate your utilization ratio monthly (borrowed amount ÷ credit limit).
Keep utilization below 30%, with under 10% being ideal.
Track usage trends to refine future credit strategies.

"A revolving credit facility provides critical capital for short-term funding needs like day-to-day operations and working capital requirements." – Adrienne Penake, Keene Advisors

Proper tracking not only safeguards your credit score but also positions your business for sustainable growth.

Funding Growth with Revolving Credit

Keene Advisors shared an example where a company expanded its credit facility to manage growth and address a $200 million debt maturity.

When using revolving credit for growth, keep these points in mind:

Forecast cash flow needs for the entire facility term (usually 3–5 years).
Plan for both short-term operational needs and long-term growth goals.
Account for carrying costs - 0.5% on undrawn portions.
Leave room for unexpected opportunities by maintaining headroom in your facility.

Timing is everything. Lenders are more likely to extend credit when your business is performing well and market conditions are favorable. Secure financing during strong periods rather than waiting for urgent needs to arise.

Other Liquidity Management Tools

Expanding your approach to liquidity involves more than just picking the right credit tools. It also includes exploring additional financing options and using real-time monitoring to stay on top of your cash flow.

Financing Options Comparison

Beyond revolving credit, there are other financing methods that can help you manage liquidity effectively. Here's a quick comparison:

Financing Type	Best For	Interest Rates	Access to Funds
Revolving Credit	Day-to-day expenses	Higher (on used amount)	Continuous access
Non-revolving Line	One-time large purchases	Lower than revolving	Single use
Traditional Loan	Fixed, long-term projects	Generally the lowest	Lump sum
Merchant Cash Advance	Seasonal or fluctuating needs	Flat fee (usually highest)	Quick access

Your choice will depend on your cash flow patterns. For example, businesses with steady revenue may prefer the lower costs of traditional loans. On the other hand, if your income fluctuates seasonally, a merchant cash advance could be a better fit despite its higher cost.

To support these financing options, integrating effective cash flow tools is equally important.

"Cash flow forecasts provide business leaders with important insight about likely changes in a company's cash position and are a critical tool for charting a successful course to the future." - Kristina Russo, CPA, MBA

Cash Flow Tools and Revolving Credit

Pairing revolving credit with strong cash flow management tools can make a big difference in maintaining liquidity.

1. Forecast Daily Cash Flows

Use software to automate data uploads and improve the accuracy of your cash flow predictions.

2. Match Financing to Needs

Use different tools for specific purposes:

Reserve traditional loans for major, long-term investments.
Save merchant cash advances for urgent or unexpected situations.

3. Automate Monitoring

Leverage treasury management systems to track:

Daily cash balances
Credit usage
Payment deadlines
Available credit limits

This setup gives you a clear view of all your financing tools while keeping revolving credit as your go-to option for flexibility. By combining this with lower-cost options strategically, you can manage liquidity effectively without overspending on financing.

These strategies work together to strengthen your overall liquidity management plan.

Managing Liquidity with Revolving Credit

Using revolving credit effectively requires careful planning and discipline, especially when addressing cash flow needs.

How to Use Revolving Credit Wisely

Here are some practical tips:

Set Clear Limits: Keep borrowing under 30% of your credit line and track your usage frequently.
Prioritize Repayments: Paying more than the minimum reduces interest and keeps your credit in good shape.
Stay Proactive: Regularly review financial metrics to adapt your liquidity strategy as needed.

If you're looking for additional guidance, consulting with experts can help fine-tune your approach and align it with your business growth plans.

Support from Phoenix Strategy Group

Phoenix Strategy Group

Phoenix Strategy Group offers services designed to strengthen your financial management, including:

Creating detailed 12-month rolling cash flow forecasts
Crafting contingency plans for various scenarios
Setting up real-time systems to monitor finances

"A revolving credit facility, set-up with a bank or financial institution, is an effective tool for managing both short-term and long-term liquidity needs", says Keene Advisors.