Working capital limits come in two broad forms. Fund-based limits, such as cash credit and overdraft, put money in your account. Non-fund-based limits, such as letters of credit and bank guarantees, extend the lender's credit support without an immediate cash outflow. Many businesses use only the first kind, because it is familiar. That is often expensive.
Why the mix matters
Funded borrowing carries interest on the amount drawn and ties up the lender's balance sheet. Non-fund limits typically cost a commission and, where suitable, can substitute for borrowing against purchases or contractual obligations. Used well, they reduce interest outgo and free fund-based headroom for genuine cash needs.
Questions to ask of your current structure
- Are you drawing cash credit to pay suppliers where a letter of credit could extend your payment period?
- Are guarantees you provide to customers consuming fund-based limit through margin requirements?
- Is your utilisation consistently near the limit, leaving no buffer for peaks?
- Are you concentrated with a single lender that sets the terms?
Matching limits to the cycle
The right mix follows your operating cycle: how long you hold inventory, how long customers take to pay and how long suppliers allow. A manufacturer importing raw material, a contractor providing performance guarantees and a trader with seasonal peaks all need different structures.
Diversification and negotiation
Spreading limits across more than one lender creates choice. It also lets you place each type of limit where it is priced best, rather than accepting a bundle. This is where structured syndication earns its keep: comparing offers on the same footing.
A review of your current limits against your actual cycle is often the quickest route to a lower overall cost of credit.
This article is for general information and is not financial, legal or tax advice. See our disclaimer.