written by Josh Beaird
Historically, community banks structured business lines of credit to mature in one year or less, even if they knew there was a high likelihood of renewal. This reduced the amount of capital that banks had to maintain, since they only had to maintain capital against lines with maturities greater than one year.
The introduction of Basel III changed the calculation. These regulations require that banks now maintain minimum capital levels against all loan commitments, not just those with a maturity of greater than one year. Therefore, a capital advantage no longer exists to structure credit lines in this way.
Is it time to rethink credit line structures?
It may make sense to begin structuring business credit lines with two or three-year commitments, instead of one year or less. The substantial administrative costs to underwriting and documenting lines annually, not to mention hassles and inconveniences for small business borrowers, would be greatly reduced. This approach makes the most sense for lines that have a high probability of renewal anyway.
Enact Non-Usage Fees
Additionally, your bank must maintain capital against your entire line of credit commitment, not just the amount that businesses borrow. Therefore, it may make sense to introduce a non-usage fee on borrowers who aren’t active with their credit line.
For example, if a business has a $800,000 line of credit but rarely borrows more than $100,000, you could impose a 1% non-usage fee on $700,000. Or you could simply reduce the line to more accurately reflect how much money the business is borrowing.
Capital is expensive, so now is the time to plan your capital requirements. Please contact us if you have any questions 417-881-0145.
