Annual Clean-Up

Remember how every once in a while, your mom would suddenly declare some Saturday that you absolutely would NOT be leaving the house until your room was completely cleaned. The annual clean-up is the financial equivalent of that, only in this case a bank is your mom and a business with a line of credit is you as a kid.

In order to make sure that a business has viable prospects on its own, some lines of credit require an annual clean up. This means that at least once a year, the business with the credit line has to pay it back completely.

Businesses use lines of credit to smooth over slow parts of the year. So if you own an ice cream stand, you might use a line of credit in the winter to pay your employees when demand for cold treats is low. Then, in the summer, when lines are around the block, you can use the extra profits to pay back the credit line and get it back to even.

Banks want to make sure that a business can survive on its own and isn't just keeping itself open with the line of credit. They don't want the business to draw the credit down to nothing and then just declare bankruptcy. The annual clean up guards against this kind of eventuality, because it forces the business to prove it has the money at least sometimes in order to get even.