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In the previous article, we have already studied what Swingline loans are. We now know that such loans are different from revolving credit which is offered by many commercial banks. Over the years, Swingline loans have come to occupy a very important place in commercial banking. There are some people who believe Swingline loans are a great innovation whereas there are others who believe that Swingline loans can have negative effects on the health of a business.
In this article, we will try to have a closer look at both the pros and the cons of Swingline loans. This will help the reader make a more informed decision about Swingline loans.
Swingline loans are popular amongst corporate borrowers since they provide several advantages. Some of the advantages are as follows:
Swingline loans are like revolving credit. This means that the commercial bank assigns a limit to the corporate borrower based on their credit rating. Hence, when the corporation needs the money, they do not have to go through a lengthy application process. Instead, the loan can be disbursed at very short notice. Many corporations believe that Swingline loans are the corporate equivalent of the overnight funds market to which banks have access.
Swingline loans give businesses the ability to access their funds whenever required. Hence, there is no need to maintain extra funds. This helps reduce the amount of working capital required and better manage the overall cash flow.
Corporations can use Swingline loans to lock in better prices while they arrange for the cash flow required to pay off the Swingline loan.
Swingline loans have come under a lot of criticism because of the perceived negative effects that they have on businesses. Some of the negative impacts have been listed below:
Commercial banks are not comfortable lending out money for the long term via Swingline loans. Hence, they levy high charges in order to discourage corporate customers from holding on to such loans for the long term.
For instance, if the overall credit limit which a bank has to offer is $100, then the Swingline loan will be $20 which will be deducted from the $100 limit. Hence, if a customer decides to avail of their Swingline credit, they cannot obtain other credits. This is because banks decide to limit the overall exposure towards a particular firm. Hence, many firms believe that taking on expensive credit in the form of Swingline loans is a suboptimal use of the bank’s funding capabilities.
Hence, it can be said that Swingline loans have both pros and cons. Such loans may not be suitable for all types of businesses. However, they do provide a lot of benefits to certain businesses in certain specific scenarios.
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