Swingline Loans: Definition and How it Works!

Businesses utilize debt financing facilities for several operational and investing activities. Repayment of debt financing is usually arranged on regular repayment terms. Some revolving credit facilities and redeemable debts need large one-off settlements. One of the many solutions for businesses struggling to pay off these loans is to use a Swingline loan facility.

Definition

A type of lending facility that can be used to cater to the debt repayments in full or partial is termed as a Swingline debt facility.

Swingline loan is a form of short-term financing. Large corporations, in particular, use the Swingline debt facility to serve their borrowing repayments. It is similar to an individual borrower’s payday loan, or a revolving credit facility for businesses. Lenders usually, lend the Swingline facility from a day to 15 days period. However, as the borrowing needs are recurring, the borrowers often avail of the facility or revolving terms.

What is Swingline Loan?

Large businesses utilize the Swingline loan facility to make one-off or installment repayments. Lenders do not require any collateral for such debt lending. Swingline loans are one form of unsecured loans and come with high interest and serving charges. Borrowers can obtain a large lump sum or revolving credit terms from one day to a few days or one month.

Borrowers may utilize the Swingline as a separate debt serving facility, or as part of an existing loan. The prime purpose and covenant with Swingline loan come for the utilization of lending amounts for debt repayments only. Typically, we cannot use these loans to fund other business or investing activities.

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How Swingline Loans Work?

Large financial institutes like Wells Fargo Bank, Goldman Sachs, Chase, etc. fund the syndicated loan facilities. These syndicate loans offer large financing facilities to businesses and governments. One form of offering loans to large entities is to offer a Swingline loan facility.

Borrowing companies can utilize the facility to cover the loan installments or settlement amounts. Borrowers may also make use of the facility to recover the cash or liquidity crunch.

However, Swingline loans are different with some covenants attached for the borrowers as:

  • Swingline Loans can only be used to fund the loan repayments in the full or partial settlement.
  • We cannot utilize it for other business activities such as project financing, investing, or dividend payments.
  • Both parties can mutually or distinctively call off the facility.
  • These loans can take the form of a large one lump sum lending or a revolving credit facility.
  • These loans come with high-interest rates, high service fees, and a short maturity period.

Apparently, Swingline loans work similarly in working form like any other loan. Its unique features or covenants make them different from conventional revolving or overdraft facilities. Cash crunch, lower sales, and one-off large payments are prime drivers behind the needs for such unsecured high-interest loans.

Real-World Example

Most of the large finance institutes like Wells Fargo, Goldman Sachs, Chase bank, etc. fund such large Swingline loans. Most of these loan facilities come with Syndicated loans. Large investment entities make contributed investments in syndicate loan funds, which are then used to lend money to other institutes. Borrowers of these large loans are also large corporate entities, public companies, and even governments.

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One recent example of a Swingline Facility is of Wells Fargo signing a $50 million revolving credit facility with United Fire Group Inc. The revolving facility included a $5 million Swingline Sub-facility to cater to the loan repayment needs of the borrower.

A few years ago the US electric car manufacturer Tesla acquired a $ 500 million revolving credit facility with a syndicated loan. The loan amount included a sub-facility of $ 100 million letter of credit and $ 40 million of Swingline loan. The syndicate fund contributors in the deal were Deutsche Bank, Bank of America, Goldman Sachs, JP Morgan, Morgan Stanley, Wells Fargo, and Credit Suisse.

Advantages of Swingline Loans

Much like an individual’s payday loan, the Swingline facility serves quick access to the lending facility for corporate borrowers. It serves many advantages to the borrowers and lenders alike:

  • Borrowers gain access to quick cash for loan repayments and secure themselves on loan defaults.
  • These loans are facilitated for the short term.
  • These loans can be arranged on very short notice, usually on the same day or application.
  • The borrowers do not need to pledge collateral, unlike other bank loans.
  • Companies can utilize the Swingline loans to reduce the liquidity and cash crunch effects on business.
  • The Borrowers can acquire a one-time large sum or on revolving credit terms from one day to a few days of loan maturity.

Much like other financing and investing instruments like Stocks, Bonds, Bank Credits, and debentures, these loans continue with renewed terms. Interest rate changes and the borrower’s extraordinary risk profile assessment changes the lenders’ perceptive though.

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Disadvantages of Swingline Loans

Similar to any unsecured and pay-day loans, the Swingline loans also come with limitations for the borrowers.

  • Borrowers would need high creditworthiness to acquire Swingline loans.
  • It comes with utilization covenants. We can only utilize these loans to service existing debt facilities.
  • Repayment terms are short unless both parties make it a revolving facility.
  • Interest rate and servicing costs are higher than usual bank credit facilities.
  • Small businesses with lower credit profile and credit score may find it difficult to acquire these loan facilities.
  • Renewal terms for Swingline loans may not work smoothly as in a bank revolving credit facility.

Practically the distinguishing feature of Swingline loan of using the funds for debt servicing becomes its biggest shortcoming. Borrowers cannot cater to any other business needs with these loans. However, companies can use these loans to reduce the cash shortfall by using it as a top-up for existing revolving or working capital loans.

Conclusion

Swingline loans come with quick access to cash for the borrowers. These loans can work as revolving credit terms. However, These loans can only be utilized for servicing existing debt facilities. The interest rate and servicing costs with Swingline loans are much higher than traditional bank loans.

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