Definition
A money market line is an agreement between a bank and a company that allows the company to borrow up to a specified limit each day in the money markets. These borrowings are typically short-term, ranging from overnight to up to one month. This facility is useful for companies in managing their daily cash flow needs, obtaining liquidity, and covering short-term financial requirements without the need to secure long-term financing.
Examples
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Corporate Treasury Management
- A large corporation with fluctuating daily cash needs uses a money market line arrangement to manage its liquidity efficiently. When the company has a shortfall in cash, it borrows from the money market through the bank for a day or two until receivables are collected.
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Financial Institutions
- A financial institution faced with short-term liquidity requirements opts for a money market line with a commercial bank. The arrangement allows it to manage funds by borrowing overnight or for a few days until liquidity conditions stabilize.
Frequently Asked Questions (FAQs)
Q1: Why would a company use a money market line instead of long-term financing?
A1: Companies use money market lines for short-term financing needs as it is quicker and more flexible than obtaining long-term financing. It helps manage daily cash flow fluctuations and avoid paying interest on funds not in use.
Q2: What are the typical terms of a money market line?
A2: Terms typically include the maximum limit that can be borrowed daily, the interest rate applied (often tied to market rates such as LIBOR or the Federal Funds Rate), and the duration for borrowing (commonly overnight up to one month).
Q3: Are there any risks associated with using a money market line?
A3: Risks include the potential for rising interest rates, which can increase the cost of borrowing. Additionally, reliance on short-term funding may expose the company to liquidity risks if the money market becomes constrained.
Q4: How does a money market line differ from a committed facility?
A4: A money market line is often an uncommitted arrangement, meaning the bank is not obligated to provide the funds. A committed facility, in contrast, legally binds the bank to provide funds up to the agreed limit.
Q5: Can a small business utilize a money market line?
A5: While more common among larger corporations and financial institutions, small businesses can utilize money market lines if they have established relationships with their banks and meet underwriting criteria.
Related Terms
- Uncommitted Facility: A type of loan facility where the lender is not obligated to provide funds until a formal agreement is made for each borrowing.
- Commercial Paper: Unsecured, short-term debt issued by a company typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.
- Line of Credit (LOC): An arrangement between a financial institution and a borrower that establishes a maximum loan balance that the lender will allow the borrower to maintain.
- Liquidity Management: The strategies and processes used by a company to ensure it can meet its short-term obligations as they come due, including the use of money market lines and other instruments.
Online References
- Investopedia’s Explanation on Capital Markets
- Financial Times Lexicon on Money Market Line
- SEC’s Information on Money Market Instruments
Suggested Books for Further Studies
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
- “Investments” by Zvi Bodie, Alex Kane, and Alan Marcus
- “Financial Markets and Institutions” by Frederic S. Mishkin and Stanley G. Eakins
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Accounting Basics: “Money Market Line” Fundamentals Quiz
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