No matter how careful you are with your money, there may be times when you have insufficient funds in your account to cover a large check or debit payment. Bouncing a check is not a good idea, as most banks will charge you a non-sufficient funds (NSF) fee if your account has a negative balance. One solution is to use a cash reserve line of credit, which supports customers through times when cash is not plentiful.
What's a Cash Reserve Line of Credit?
A cash reserve line of credit is a relatively small line of credit that protects checking accounts from unintended overdrafts – mostly, though not always, for business customers. It’s a separate account, linked to the account holder's checking account, which the account holder can draw on in times of need. For example, a seasonal business that receives lower revenue during the winter months may use the cash reserve to cover essential bills and outgoings during this time. The cash reserve line of credit is there to ensure a business does not have cash flow problems if it needs money in a hurry.
What’s the Credit Limit?
Since a cash reserve is intended to be an emergency fund, to tide a business over in times of low cash flow, the credit limit tends to be relatively small. Eastern Bank, for instance, offers a cash reserve of between $1,000 and $15,000 for both businesses and consumers. The amount of credit you get depends on your credit score and past credit history.
Generally, there’s no limit to how much a customer can draw from the line of credit at any one time. For instance, if you had a cash reserve of $10,000, you could draw the entire $10,000 in one month, or you could draw smaller amounts over several months when you needed the money.
Some banks manage their cash reserve lines of credit a little differently. State Bank, for example, will give its customers a credit line up to $2,000, which is released in $100 increments whenever the customer's checking account is in danger of becoming overdrawn.
What’s the Interest Rate?
The cash reserve works like a credit card, in that you only pay interest on the amount of credit you actually borrow monthly. Interest starts accruing from the date you draw on the cash reserve. Rates vary widely depending on the lender and your credit history. Rates in the region of 10 percent to 20 percent APR are not uncommon.
For business accounts, some lenders will specify a fixed interest rate plus the Wall Street Journal Prime Rate for its cash reserve accounts. For instance, if the flat rate is 7 percent and the WSJ Prime Rate is 3.25 percent, you would be charged a rate of 10.25 percent on the amount you borrow. Each bank has its own conditions, so be sure to check the small print before you sign.
Is a Cash Reserve the Same as an Overdraft?
A cash reserve line of credit is a lot like overdraft protection, in that it protects you from paying large overdraft and NSF fees if you unintentionally go overdrawn. The main difference is how the financing is secured. For business accounts, the bank will often require collateral to secure the line of credit. This security typically will be a tangible business asset, like a property or stock.
Consumer overdraft protection, on the other hand, does not usually require security. The lender simply allows the consumer to carry a negative balance for a short period, without incurring a large overdraft fee.
- Eastern Bank: Reserve Line of Credit
- Bankrate: Prime Rates
- State Bank: Cash Reserve Line of Credit
- Consumer Financial Protection Bureau. "Understanding the Overdraft 'Opt-in' Choice." Accessed Sept. 4, 2020.
- Corporate Finance Institute. “Cash Credit.” Accessed Sept. 4, 2020.
- Consumer Financial Protection Bureau. "My Bank/Credit Union Offered to Link My Checking Account to a Savings Account, a Line of Credit, or a Credit Card to Cover Overdrafts. How Does This Work?" Accessed Sept. 4, 2020.
- National Credit Union Administration. "Overdraft and Non-Sufficient Funds (NSF) Fees." Accessed September 4, 2020.
- Consumer Financial Protection Bureau. "You’ve Got Options When It Comes to Overdraft." Accessed Sept. 4, 2020.
- Citigroup. "Go Further with Preferred Banking Benefits." Accessed Sept. 4, 2020.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.