Introduction to Finance

prime rate 
interest rate the bank 
charges its most creditworthy 
customers
line of credit 
loan limit the bank 
establishes for each of its business 
customers

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500
C H A PT E R 1 6 Short-Term Business Financing
If the business needs more money than anticipated at the time the line of credit was set 
up, it may request the bank to increase the limit on its line of credit. It must be prepared, 
however, to off er sound evidence of the need for additional funds and the ability to repay the 
increased loan from business operations. A request for an increased line of credit frequently 
occurs when a business is growing and needs more capital to make its growth possible. Banks, 
following the principle of maturity matching discussed previously, generally insist expansion 
be fi nanced with long-term funds, but they may assist growth by temporarily providing a part 
of the increased needs. The business that is unable to obtain additional unsecured credit from 
its bank may seek a loan secured with collateral from the bank or from other lenders. These 
other forms of borrowing are discussed later in this chapter.
Bank mergers have aff ected the ability of fi rms to obtain lines of credit. 
Table 16.1
lists 
large banks that were in existence, in one form or another, from 1990 to 2016; by 2016, they 
had merged into three banks. That doesn’t mean, however, the larger banks are eager parti-
cipants in meeting the line of credit needs of larger fi rms; fewer banks have meant tighter 
credit and higher fees.
5
A survey of corporate fi nancial offi
cers found that 78 percent believed 
the mergers reduced the number of loans and 72 percent had fears of monopolistic pricing by 
merged banks. Fortunately, as the fi eld of banking changes to one of fi nancial services, other 
entities, such as commercial fi nance companies, insurance companies, and even some mutual 
funds are lending to fi rms and taking the place of the traditional banking relationship.