Ask SCORE
&nb=
sp; =
&nb=
sp; =
&nb=
sp; =
&nb=
sp; =
&nb=
sp;
43=
Establish a Line of Credit to Manage the Unexpected
A l=
ine of
credit, sometimes called revolving debt, enables a company to draw against a
pool of money as it needs to. That line of credit is invaluable for protect=
ing
your business from emergencies and stalled cash flow because it extends the
cash available in the business checking account to the upper limit of the l=
oan
contract. Essentially, the line of credit is assurance by a bank that as lo=
ng
as your company is financially healthy, it can borrow money whenever it nee=
ds
to.
Thi=
s form
of short-term borrowing is an excellent way to establish a relationship wit=
h a
bank and demonstrate the creditworthiness of your business—especially=
if
you have but don’t use the line of credit. Moreover, by virtue of hav=
ing
this relationship, your banker can become a sort of silent partner, giving =
you
business operation advice as well as money.
You=
’ll
find many variables in a line of credit, such as the period of time (short =
or
intermediate), whether it is renewable or nonrenewable, and whether it has a
fixed or fluctuating rate of interest.
A
short-term line of credit typically is 60 to 120 days, whereas an
intermediate-term line may be as short as one year or as long as three.
You’re most likely to want the line of credit to purchase inventory a=
nd
to pay operating costs—not to purchase equipment or real estate. The
Small Business Administration offers qualified small businesses CAP Lines loans to meet their short-te=
rm and
cyclical working-capital needs. The five programs are called Seasonal Line,
Contract Line, Builders Line, Standard Asset-Based Line, and Small Asset-Ba=
sed
Line. For more information, visit www.sba.gov/financing/fr7aloan.html.
To
negotiate a credit line with your bank, prepare to hand over your current
financial statements, latest tax returns, and a statement of projected cash
flow.
<=
/span>
What
collateral will you use to secure your loan? You’ll need more than the
assets you may be purchasing with it, such as the company’s accounts =
receivable,
equipment, and real estate. The loan agreement and related documents will be
designed to ensure that your loan payments are on time and have priority ov=
er
non-critical expenses, dividends and employee bonuses.
Thi=
s is a
key point for avoiding confusion and resentment over what your bank is will=
ing
to do for you. Some small business owners think the loan officer doesn̵=
7;t
understand their business requirements. At the same time, the loan officer
doesn’t think the borrower is making realistic projections for
anticipated cash flow, profitability, and the like.
As =
loans
go, banks tend to view line-of-credit loans as low risk, so they carry the
lowest interest rate. The bank may reserve the right to cancel the loan if =
it
thinks your business is in jeopardy. You’ll make interest payments
monthly, regardless of when you expect to pay off the principal. For an ann=
ual
fee, most banks will allow one-year lines of credit to renew almost
automatically. However, they may require the credit line to be fully paid o=
ff
for between seven and 30 days each contract year.
If =
you
would like to discuss this topic or business planning, business growth
strategies or a specific business issue, contact SCORE® “Counselo=
rs
to
# # #