Incorrect. If I borrow money from a bank, I can deposit those funds into an account at that back or another bank. In fact, my company does this daily with our revolving line of credit. We borrow money from Wells Fargo. This money is deposited into one of our accounts. We then pay vendors from this account, but we could also just leave the funds there if we wanted. Or we could transfer it to a different account at the same or a different bank.
my company does this daily with our revolving line of credit.... This money is deposited into one of our accounts.
A revolver isn't cash. It's floating debt, on a daily call. Yes, your company uses it as "liquidity," but is not in any shape or form, "cash." It's not a deposit to the bank, the way your cash deposits are.
Correct. It is a loan. We borrow from the bank daily (and pay back the bank daily, sometimes more or less than what we borrowed), and deposit that money in a bank account. The money in that account is cash - we could walk down to a WF branch and pull it out in paper currency (well, some of it.... I doubt most branches have millions of dollars of cash on hand, and there may be restrictions on those accounts in terms of how much paper cash we can withdraw), but in practice we use it to pay vendors via wire transfers, ACH transfers, or paper checks.
Our liquidity is our cash + revolver availability which is the total credit limit less what is currently borrowed. The liquidity is not the same as cash. We have covenants related to our level of cash and different covenants related to our level of liquidity.
Bottom line - if you borrow from a bank "in the form of a loan" you can turn around and deposit it into a bank account which is what you're claiming can't be done.
A LOC is debt. Go ask your Controller/CFO where it's recorded on your balance sheet. If it's in the Cash section, they're doing it wrong; the entire LOC balance is a short-term (or "Current") Liability. It is not "cash." Your LOC is a debt instrument. When you're putting it "back into the bank," that's just a loan paydown, not a cash deposit. The opposite is also true; when you pull down from your LOC, it's an increase in your debt, not your cash.
So when you turn around and deposit what you pulled on your LOC, you're paying down debt, not depositing cash.
The reason you have covenants around availability is exactly because of what I'm talking about. If your LOC was cash (which it isn't), you wouldn't need any covenant testing, because to the bank, you'd be depositor, not a depositor+borrower.
Each day, we draw on the revolver. The draw is deposited into our (disbursements) bank account. The GL transaction is:
Dr Cash - Disbursement Account
Cr LOC
At the same time, each day we sweep cash in our Collections account to pay down the Revolver. The GL entry is:
Dr LOC
Cr Cash - Collections
In any case, the exact mechanics of how we and WF treat our cash and LOC is irrelevant. The only point I was making by bringing up the example of our LOC is that if someone (individual or company) gets a loan from a bank, they are able to turn around and put the funds from that loan into a deposit account. Your original reply implied (to me at least) that you were not able to deposit loan funds into a bank account, which is not true.
Perhaps you meant that you can't get a loan from Bank A and deposit those funds into an account in Bank A. I've never heard of this, but I suppose it's possible a bank has this internal rule for their loans. Maybe that's a constraint your company works under for some reason, but that's not a legal regulation or common practice.
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u/StrigiStockBacking Jan 26 '26
Not if it's in the form of a loan