Swingline Loan: Definition, Use in Business, and Example

What is a Swingline Loan?

A swingline loan is a short-term loan made by financial institutions that provides businesses with access to funds to cover debt commitments. A swingline loan can be a sub-limit of an existing credit facility or a syndicated credit line, which is financing offered by a group of lenders. Swingline loans typically have short operating durations that can range from five to 15 days on average.

Swingline loans are helpful to companies since they provide much-needed cash relatively quickly. However, swingline loans often carry higher interest rates than traditional lines of credit, and the funds are limited to covering debt obligations.

How a Swingline Loan Works

Financial institutions make swingline loans to both businesses and individuals. A swingline loan for individuals is similar to a payday loan, providing cash quickly. However, fast access to credit comes at a cost in the form of a significantly higher interest rate than other forms of credit, such as bank-issued personal loans.

Companies can use swingline loans to cover temporary shortfalls in cash flow, and in that sense, they are similar to other lines of credit in how they function. However, the funds provided by this type of loan are meant to be used only for paying down existing debts. In other words, the funds can not be used for expanding the business, acquiring new assets, or investments in research and development.

The limitation of the use of funds differentiates swingline loans from traditional lines of credit, which can be used for almost any purpose such as buying goods and debt repayments.

Swingline loans can be tapped or drawn down on the same day a request is made to the lender and be issued for smaller amounts than the existing credit facility.

A swingline loan can take the form of revolving credit, which is a line of credit that the borrower can draw on, and payback, repeatedly. Though the loan normally has an upward limit, as long as the funds are paid back as agreed, they can be withdrawn as needed on very short notice. Often, borrowers can receive funds on the same day they request them, and the cycle of repayment and withdrawal can continue as long as all the conditions of borrowing are met and both parties choose to keep the line open.

Revolving credit lines, including swingline loans, can be closed at the discretion of either the borrower or the lender. Lenders have the option to close any line of credit that they consider to be too risky. Swingline loans are best suited for use in cases where normal processing delays make other forms of loans impractical.

Pros and Cons of Swingline Loans

As with any borrowing facility, there are pros and cons to each credit product. Company executives must weigh the benefits and drawbacks to determine if a swingline loan is a viable option.

  • A swingline loan can give the borrower access to a large sum of cash.

  • Swingline loans can be accessed on very short notice.

  • Swingline loans help companies with cash flow shortfalls and keep their debt payments current.

  • Swingline loans need to be repaid quickly.

  • Swingline loans often carry higher interest rates than traditional lines of credit.

  • The use of funds from swingline loans are often limited to paying debt obligations.

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