NATURE OF CREDIT LINES (2)

Furthermore,many businesses with large credit needs find it necessary to establish multiple credit lines, i.e, credit lines at a number of banks. Firms sometimes have multiple credit lines,so that they can meet the annual loan cleanup requirement of banks by securing a new loan from a new bank to pay off an outstanding loan at another bank.
COMPENSATING BANK BALANCES When they set up a credit line for a business borrower,most banks also establish a minimum deposit balance that will be required. The range for this minimum balance typically seems to be 10 to20 per cent. When credit is tight the minimum balance required may be increased,whereas a greater availability of credit may be reflected in a lowering of the bank's minimum balance requirement. For sales finance companies,which are important users of bank credit lines,the most common minimum balance requirement seems to be 10 per cent of the credit line when not borrowing and 20 per cent when borrowing. This reduces the funds available for the borrower to use. for example,a borrower who pays 8 per cent on a loan,but must keep 20 per cent of the loan on deposit with the bank,is only receiving 80 per cent of his loan. Hence,the borrow is really paying an effective rate of 10 per cent of the money that e can use. In computing the average minimum balance maintained,the bank is usually willing to relate this requirement to the average deposit over the entire year,though sometimes a bank insists that this minimum deposit must be maintained at all times.