Bank Loans : LOC - Financing your deals with a Line of Credit in the plastic industry -

A line of credit is a flexible loan from a bank that lets you borrow up to a certain limit, paying interest only on what you use.

Common Uses in Plastics:

Raw Material Purchases:

• Bulk resin orders
• Emergency material needs
• Taking advantage of price drops
• For seasonal buying
• For inventory building

Resin Order: is a purchase order specifically for plastic resins (raw plastic materials in pellet or powder form) used in manufacturing plastic products. These orders typically specify the type, grade, and quantity of resin needed.

Equipment and Operations costs:

• Machine repairs costs
• Tool purchases
• For operating expenses
• To cover maintenance costs
• Could be used as emergency funds

Types of Credit Lines:

Secured credit lines:

• It uses for collateral
• It has lower interest rates
• It has higher limits
• Could be used for equipment backing
• Could be used for inventory backing

Collateral: is an asset or a property offered to a lender as security for a loan, which can be seized if the borrower defaults on the payment.

Unsecured credit lines:

• Has no collateral
• Has higher interest rates
• Has lower limits
• Is based on business credit
• Gets a quicker approval

Practical Example:

Credit Line: $500,000

• Current Use:       $200,000
• Available:            $300,000
• Pay interest on:  $200,000
• Reusability:        Can repay and reuse

Key Benefits:

• Flexible borrowing
• You only pay for what is used
• You have quick access to funds
• Is a revolving credit
• Could be used as an emergency backup

Revolving credit: is a flexible borrowing arrangement where you can repeatedly use and repay funds up to a set limit (like a credit card). Once the loan is repayed, that amount becomes available again.

Important Considerations when you get a line of credit:

• Interest rates
• Payment terms
• Usage limits
• Annual reviews
• Covenant requirements which are legally binding commitments that must be followed as part of an agreement or contract

Example: Line of Credit in the plastic industry:

Plastic Injection Molding Company with $5M annual revenue:

Line of Credit Details:

• Total Credit Line:      $500,000
• Interest Rate:             Prime + 2% (currently 8.5%)
• Term:                           month renewable
• Secured by:                 Equipment and inventory
• Monthly payments:   on used portion only

Prime Rate (Prime) is the base interest rate that banks use as a starting point to set rates for loans.

Usage Example:

Large Order Situation:

• Customer orders:                 $300,000 of parts
• Raw material needed:         $150,000
• Current cash available:       $50,000
• Amount drawn from LOC: $100,000

Usage Timeline:

• Day 1      : Draw $100,000 for materials
• Week 4  : Begin shipping products
• Week 8  : Receive customer payment
• Week 9  : Repay $100,000 to LOC(Line Of Credit)

Cost Calculation:

• Amount used:       $100,000
• Time used:            2 months
• Interest rate:         8.5% annually
• Interest paid:        ~$1,417
• Credit available:   returns to $500,000

This shows how the company uses LOC (Line Of Credit) to bridge cash flow gaps between material purchase and customer payment, paying only for what they use, when they use it.