Seasonal Credit: An Overview

Seasonal credit is a flexible credit arrangement that allows a business to pay their expenses consistently despite extreme fluctuations in revenue from month to month. Seasonal credit is usually approved as a line of credit and is later classified as revolving credit.

The Federal Reserve has a similar short-term lending program for smaller banks that experience severe seasonal fluctuations in loan applications.

Key Takeaways

  • Seasonal credit is used primarily by businesses that experience big fluctuations in revenue during the year.
  • This type of revolving credit is used to cover routine and unexpected business expenses when business is slow.
  • A similar type of credit is supplied by the Federal Reserve to banks in communities that are dominated by businesses with high and low seasons.

Understanding Seasonal Credit

Most businesses experience seasonal swings in cash flow but some experience extreme fluctuations. Notably, retailers look forward to "Black Friday" because that day in November is when they look forward to getting "out of the red" in their only profitable season of the year. Resorts and the businesses that cater to them are other examples.

Farmers also experience long dry periods, during which they have to spend money in order to make money from their crops.

The Slow Season

However, many manufacturers and wholesalers also experience some seasonal sales fluctuations. And, they generally have to stock up on inventory and pay their personnel months before they can expect to reap any revenue.

In such cases, many businesses borrow money to get through the lean months until the revenue starts flowing. This allows them to continue operating smoothly during months when there may be little or no income, or even to pay for business expansion or improvements that would otherwise not be possible.

Seasonal Credit and the Federal Reserve

The term seasonal credit may also refer to a type of short-term discount credit extended by the Federal Reserve. In this case, the credit lasts for up to nine months and is restricted to smaller banks that experience unusual fluctuations in demand.

The Federal Reserve defines a smaller bank as one having less than $500 million in deposits. Many of those banks serve farming communities where demand for loans is concentrated in a few months of the year.

As of late 2020, this Federal Reserve's seasonal credit rate was 0.15%.