Swingline Loans - Meaning, Need and Its Alternatives

In the previous articles, we have seen the various non-lending-related commercial banking products which are offered by banks. However, at the end of the day, a commercial bank is a bank. This means that its main business is still to lend money. When it comes to commercial banking, the loan products are quite different from the ones used in retail banking.

In this article, we will have a closer look at the concept of Swingline loans. We will also understand how these loans are different from other loan products offered by commercial banks.

What is a Swingline Loan?

  • A Swingline loan is an ultra-short-term loan or revolving credit facility which is provided to the borrower with the explicit purpose of paying down existing debt. This is one of the defining features of the Swingline loan.

    For instance, when a company takes an overdraft from a commercial bank, they can utilize the cash as per their requirements. They can buy new assets with it if they want. They could even host a marketing event with the money if that is what the company wanted!

    However, when it comes to Swingline loans, they are given to the borrower on the clear understanding that this money will only be used to repay old debt. In many cases, banks do not even disburse the loan to the borrowing corporation. Instead, they directly pay off their creditors. Hence, it can be said that the terms and conditions of a Swingline loan are more restrictive as compared to other loans provided by commercial banks.

  • Another defining feature of Swingline loan is that it is very short in duration. The average tenure of a Swingline loan is not more than 15 days. This is generally because commercial banks charge a high-interest rate on such loans. Hence, companies try to pay down these loans as fast as they can. This short tenure indicates that Swingline loans can be considered to be a stop-gap measure instead of being a permanent part of a financial strategy.

  • Companies tend to use Swingline loans as an emergency facility. Swingline loans are revolving credits which means that the company does not have to apply for a loan each time. It is like having a credit card for the company. As soon as the company pays back the old Swingline loan, they are immediately eligible to take out a new one at very short notice and with minimal paperwork.

  • Swingline loans are callable by the bank. This means that both the bank as well as the commercial borrower have the option to close the loan earlier than intended. The corporate customer can simply pay the principal and interest at any date in order to settle their dues. At the same time, banks can also call in these loans at very short notice, which makes it a solvency hazard for corporate clients. However, generally, Swingline loans are not taken for very large amounts and if need be the corporation can liquidate a few of its assets in order to pay the loan.

  • Swingline loans may be provided by a single bank or by a syndicate of banks based on the amount required and the banking relationship of the corporate with various banks. If the amount is small and a single bank is able to bear the entire risk, it will be provided by a single bank. Only in extraordinary cases does the primary commercial bank form a syndicate in order to provide their client with a Swingline loan.

  • Swingline loans are generally used by corporations to pay down their dues which they cannot pay using other methods such as corporate credit cards. For instance, if a company has to pay down tax or utility bills, it may not be able to do so using its credit cards since the vendor may not accept the same.

Alternatives to Swingline Loans

Swingline loans are widely used by businesses that are facing a cash crunch. However, they are not the only option that is available to a business. Swingline loans are inherently competing with several other banking products provided by the commercial bank itself. Some of them have been listed below:

  1. Commercial banks can provide invoice discounting or factoring services to corporations. This helps them expedite their receivables and have cash in hand so that they can pay off their creditors.

  2. Commercial banks also provide working capital loans to corporations. However, these loans cannot be provided at the same speed at which a Swingline loan can be disbursed. Hence, if the corporation is not too much in a hurry, they can avail of a working capital loan as well.

  3. Companies could also use corporate credit cards to pay off some of their debt. However, since credit card companies charge the receiver an additional fee, many vendors do not accept these cards. Also, there might be limitations on overseas payments which may make credit cards unviable

  4. Commercial banks also provide overdraft services to their corporate clients. They are similar to Swingline loans and are priced at almost the same level.

The bottom line is that Swingline loans form an important part of the overall commercial banking portfolio. There are several pros and cons of a Swingline loan which will be discussed in a later article.

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Commercial Banking