To use an operating line of credit wisely, recognize the cyclical cash flow needs of your business. Without a clear understanding of the company’s borrowing requirements and timing, you might be heading back to the bank to seek an increase or change in the credit facility terms.
Here are some tips.
* Analyze the company’s needs first. You’ll need to prepare a detailed budget of the company’s current and expected financial position, an income statement and a statement of cash flows. Further, through developing a model of expected activity, you can determine the collateral that will be available for borrowing against.
* Don’t max out the line early on. While it might not cause a problem, it could indicate poor cash flow planning, such as paying vendors sooner than the terms required. This would increase the borrowing costs of your business.
* Remember that a line of credit is generally a short-term liability. It is a working capital tool to help your business operate before cash is collected from your customers. A line of credit should not be used to acquire long-lived assets. These should generally be financed through term debt paid off over a number of years.
* Have all of your ducks in a row. Lenders will provide borrowers advance rates against their assets. Generally speaking, the higher the quality and liquidity of the assets, the higher the advance rate. For example, receivables that are less than 90 days are of greater collectability quality than a receivable that is 120 days old or greater.
* Let the structure guide you. From advance rates to committed revolvers that may not be dependent on collateral balances, developing an appropriate line of credit is in the best interest of your business. Make sure to find a line of credit that fits the needs of your business, and you shouldn’t have any problems using it wisely.
Source: SS&G Financial Services, (440) 248-8787 or www.ssandg.com.