As a loan, a line of credit will charge interest as soon as money is borrowed. Often these are revolving lines, meaning as you pay back the funds, they become available again and usually interest-only payments are due as a minimum. For example, if you have a revolving line of credit with a limit of $50,000, you could borrow $25,000 leaving an additional $25,000 available. Interest would be paid on the $25,000, usually monthly, but this will vary depending on the loan agreement.
An important detail to note is that lines of credit are not intended to be used to fund one-time purchases such as real estate, farm equipment, or cattle, although lines of credit can be used to acquire items which might not normally be underwritten for a loan. Most commonly, individual lines of credit are intended to smooth out the vagaries of variable monthly income and expenses, and to finance projects where it may be difficult to ascertain the amount of funds needed upfront. It is important to note that if you have a line of credit for business, be sure to only use it for business expenses.
Lines of credit can be useful in situations where there will be repeated cash outlays, but the amounts may not be known upfront or in situations that require large cash deposits. A good example is if a farm operation wants to purchase all of their spring seed at one time in order to receive a volume and cash discount from the vendor. If the farm doesn’t have enough cash flow to make such a large purchase, they can utilize the line of credit. This allows the farm operators to receive the discounts, pay the invoice in full, and pay off the seed bill over time from the farm’s monthly cash flows.
Lines of credit can be incredibly useful for farm operators, and as with any loan product, be sure to discuss all options with your financial services officer before making a decision for your unique farm business.
Corey Fanslau is a VP of lending and senior financial services officer with GreenStone. To learn more about GreenStone's flexible line of credit and how it can help your farm business, stop in a branch near you.