Seasonal Credit: An Overview
Seasonal credit is a flexible credit agreement that enables a company to pay its bills on a continuous basis despite large swings in income from month to month. Seasonal credit is often granted as a line of credit and then converted to revolving credit. That is, the credit line is kept open indefinitely so that the company may borrow and return money as required, up to a certain limit.
The Federal Reserve has a similar short-term lending program for smaller banks that face substantial seasonal variations in business credit applications. The initiative also has a complementary goal: to keep local businesses running during dry spells.
- Seasonal credit is generally employed by firms that suffer significant swings in income throughout the year.
- When business is sluggish, this sort of revolving credit is utilized to meet ordinary and unforeseen company needs.
- The Federal Reserve provides a similar form of lending to banks in towns dominated by enterprises with high and low seasons.
Understanding Seasonal Credit
Most firms have seasonal changes in cash flow, but some have significant variances. Notably, shops anticipate Black Friday since it is the day in November when they expect to be “out of the red” in their sole lucrative season of the year. Other examples are resorts and the companies that cater to them.
Farmers also face extended dry spells during which they must invest money in order to profit from their crops.
A store may operate on credit until “Black Friday,” when the company begins to turn a profit.
However, almost every form of company might go through a protracted dry spell between the time a product enters the planning and manufacturing phases and the time a customer gets and pays for that product. Seasonal credit is utilized to prepare for that payment.
The Slow Season
Seasonal sales changes affect many manufacturers and distributors. However, their fixed expenses do not change. Businesses must continue to pay their employees, operate their facilities, pay their taxes, and generate new orders. All of that work is in expectation of a large payoff for the company in the future.
In such instances, many firms borrow money to get through the slow months until income returns. This enables them to continue running properly even when there is little or no money. They may produce items after they have been requested but before they have been paid for. They may even pay for company expansions or enhancements that would not be viable otherwise.
As of late 2020, the Federal Reserve rate for seasonal loans to eligible lending institutions.
Revolving Credit vs. Fixed-Term Credit
Revolving credit, rather than fixed-term lending, is used by the majority of enterprises that depend on seasonal borrowing. A revolving credit line, like a credit card, may be used frequently and returned in whole or in part as needed.
It is also a long-term agreement. The line of credit stays available as long as regular payments are paid.
Fixed-term credit, on the other hand, entails borrowing a specific amount of money and repaying it in installments with interest. That makes sense only if a company is borrowing money for a one-time undertaking, such as the purchase of new equipment.
Seasonal Credit and the Federal Reserve
The phrase seasonal credit may also apply to a sort of Federal Reserve short-term discount credit. In this situation, lending is available for up to nine months and is limited to smaller banks experiencing exceptional changes in demand. 1
A minor bank is one with less than $500 million in deposits, according to the Federal Reserve. Many of these banks serve rural areas, where loan demand is concentrated during a few months of the year. However, the scheme maintains funds coming to other bodies with seasonal income variations, such as universities and municipalities.
The Fed initiative is only available to smaller lending institutions that have “demonstrated seasonal liquidity concerns.” The goal is to free up liquidity at such banks so that they may lend more money to local businesses. 2
This Federal Reserve’s seasonal credit rate was 0.15% as of late 2020. 3
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