You may require initial retail inventory, an opening stock of repair parts, accessories or office supplies such as business cards, letterhead, envelopes, staples etc. Money that finances business is called capital. A bank loan officer can often assist you in finding a workable combination of these different types of capital. Using loans approved for purposes other than those for which they were approved is considered an abuse of your loan privilege.
Leverage reflects the business 's ability to attract other loans and investment.
A fully-leveraged business has no further ability to borrow money. The line of credit is approved because the banker believes that amount of money is absolutely necessary to enable you to operate over the specified time period. The bank denies you the term loan as it does not feel that, at this stage, the business can service such a large amount of debt. With the depletion of your operating line of credit, you can no longer expect to purchase the inventory deemed necessary to achieve your projections. You return to the banker pleading for an extension of your line of credit, but the banker, feeling betrayed, has lost confidence in your management ability and may withdraw the line of credit privilege, insist on more equity, recall the loan in its entirety or force the business into receivership.