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Revolving credit pitfalls Featured

11:26am EDT July 31, 2002
If you're tempted to purchase equipment using your revolving line of credit, don't. Bankers agree revolving credit is for short-term purchases, not long-term items like equipment or real estate, and for good reason.

"Short-term credit terms are not always as lucrative," says Kim Coleman, assistant vice president and credit manager for Huntington Bank. "It would be like purchasing a house with a credit card."

Revolving lines of credit allow for regular draws and payments for a specified period, usually one year. Mike Gonsiorowski, president of National City Bank's central region, says revolving credit lines are flexible and add liquidity for unexpected cash demands.

"But if you use the money for large capital purchases, you may run out of money when you need it," he says.

Revolving credit is designed for short-term purchases like purchasing inventory. And, says Coleman, you need to pay a substantial portion of it off on a regular basis.

"When a company doesn't pay its line of credit down on a regular basis, it incurs more interest costs and it gives a false picture of the financial ability of the company," she says. "One indicator that a company is financially healthy is its credit line going up and down."

To avoid the pitfalls of revolving credit, you need to understand the terms of your line of credit and use it properly.

"It boils down to a lack of understanding," says Gonsiorowski. "The company needs to use it for the purposes for which it was obtained, keep track of the maturity date and bring the credit line to zero for some period of time over the 12-month term."

Coleman says proper use of a revolving line of credit is like a dance.

"Businesses need to be in touch with their business cycles and learn the rhythm of the cycle, know when to use the credit line, and then pay it back," she says. "They dance together." How to reach: Huntington Bank, (614) 480- BANK or www.huntington.com, National City Bank, (614) 463-8250 or www.nationalcity.com