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This post is part of our Field Guide to DTC eCommerce Capital. Click the links below to read more chapters from the guide.
Bank Revolving Credit
Credit Lines or Lines of Credit are standby facilities that you can use when you need them. They technically come in two flavors: revolving and non-revolving. For the purposes of DTC and eCommerce, we are only going to discuss revolving debt. (Non-revolving debt is typically just used for a one-time event, like setting up a foreign subsidiary.)
These are great tools for managing cash needs on a day-to-day or monthly basis. With bank revolving credit, the bank sets a credit limit, and you can draw down, pay back, and draw down again as needed. In general, banks don’t love revolvers because of the uncertainty of their usage. They have to make the amount available for you to draw on within tight timeframes which requires them to reserve or have cash available as needed. That in mind, banks will often want you to use other products to generate other fees in order to get a revolver.
- Low interest rates.
- This option provides peace of mind, as the money is available whenever you want it.
- You only pay for what you use.
- Nothing is free. With standby rates, you are partially paying for the ability to get cash when you want it.
- These loans are often only available if you have other business with the bank that generates sufficient fees. Banks generally look at all the ways they do and could generate fees from you (accounts, mortgage, investments, etc.) That potential for fees then determines what you get and at what rates.
- There is limited capacity. To free up credit, you have to pay down what you owe. It can be hard to get increases in credit lines, so your ability to scale as you grow may be limited.
- VC-path companies with sizable revenue and/or recent rounds and cash in the bank
- Profitable, established companies with good credit
- Other bank debt products
- Venture debt
- *Does not go well with MCA or ABL (see below)