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.
Related or Semi-related Video
Finance: What are Credit Scores and Wort...21 Views
Finance allah shmoop What are credit scores and credit worthiness
Remember that scene from wayne's world Alice cooper lets him
backstage They bow and chant Where'd i worthy We're not
worthy Well basically just swap one of the greatest rock
and roll singers with your local banker Yeah well as
much as you'd rather hang out with alice cooper this
nerdy guy here is wet A more important to your
credit That long hair thing worked when he was in
his twenties And not so much now I guess Anyway
if you have a bank account or a credit card
or are generally tapped into the banking and credit system
of the world in any way shape or form you
have a credit score You might not know it But
you do Where does that score come from And yeah
It's known as yours Fico score While fico stands for
fair isaac corporation that's a publicly traded company and that's
what they do they provide credit scores and they try
to be fair like isaac Anyway those scores were requested
and released through one of the big three credit bureaus
Equifax experian in trans union Oh my These guys give
you a number That kind of thing finds your reliability
in making payments to banks or other lending institutions who
might loan you dough Well why would you care home
Because that number you get directly affect the price you
pay to rent money The worst Your credit score the
higher your rent have will likely be in who likes
to pay high rent especially when it comes to renting
money Well the worst fico score is a zero and
were wondering what you'd need to have done Teo get
that like three bankruptcies in a bank robbery Maybe Well
we want to meet the third guy who loaned you
money at that point Anyway the bill gates perfect score
is an eight Fifty on such a show off And
here are roughly the breakdowns for how banks think of
credit Score c it's all color coded here with the
red yellow and green Well the goal here in having
a score is to determine your reliability in paying back
a given loan Yes the amount you're borrowing also matters
But to speed up the initial evaluation of you is
a borrower Wealthy credit score is applied to you and
it lets banks quickly come to a yes or no
or ah maybe decision Yeah quickly that credit score thing
helps and if the answers and no well then you
can always backpack across the country and stay in youth
hostels So yeah you don't want to be murdered by
a deranged dutch businessman and we suggest you stay current
on your us visa payments and have a high credit 00:02:30.173 --> [endTime] score Be creditworthy because you are worthy Hope yellow
Up Next
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
What is a Credit Limit? Financial institutions that lend money in the form of credit can do so in different facility configurations, usually with a...
What is a line of credit? A line of credit is kind of like a loan. A bank gives a borrower a line of credit, which basically says they can borrow â...