Most businesses at one time or
another need to manage cash flow
issues, which may include finding ways to survive a shortfall in cash. Even
something as simple as a late payment
from a major customer could cause problems.
“Savvy business owners need to prepare
today by arranging for a line of credit with
their financial institution or bank,” says
Yvonne Stewart, assistant vice president
and senior business relationship manager
with ViewPoint Bank in Plano. “Business
owners need to assume that someday they
will need to bridge the gap in their cash
flow. If they wait until there are problems
in the business because of cash flow, it may
be too late to get a line of credit.”
Smart Business spoke with Stewart
about the benefits of applying for a business line of credit early and the best way
the business owner should use the funds.
Under what circumstances should a business
owner apply for a line of credit?
It’s wise to get a line of credit even if a
business is not currently having cash flow
issues. Chances are excellent that a business will be able to get a line of credit if the
company’s financial history is solid.
Getting a line of credit in these circumstances is a little like an insurance policy in
case a business owner does come up short
during the month and needs to make payroll or pay bills.
The reason for asking for a line of credit
ought to be because cash is not available
due to accounts receivable, not because
profits are down. The line of credit needs
to be used because the business is not collecting as fast as it needs to pay out, not
because something is fundamentally
wrong with the financial picture of the
business. So the line of credit should be thought of as a safety net to tide the business over until the accounts receivables
come in.
What should a line of credit, ideally, be used
for?
For a short-term loan used to make payroll and pay bills until the accounts receivable money starts rolling in. Lines of credit
are meant to be used, paid off, then used
again as necessary.
It’s also a good idea to get a line of credit
if you are looking at growing your company in the near future. You may need the
cash for a growth opportunity.
What kind of collateral is necessary to get a
line of credit?
It depends on the financial institution, but
typically, a line of credit under $125,000
does not require collateral to secure the
loan. It will require a personal guarantee
from the business owner, however. Larger
lines of credit do require collateral — usually accounts receivables.
Are there any rules or formulas to determine
the right amount for a line of credit?
There are no math ratios for lines of credit. The business owner is the best person to
determine how much they need to tide
them over during a cash flow issue. One
question that both banks and business
owners need to ask is this: Can the business comfortably make monthly payments
for one year on a line a credit if it is fully
drawn?
What should a line of credit NOT be used for?
Some businesses ask for a line of credit
to purchase equipment or make capital
improvements, but this is not what it
should be used for. The business owner
needs to apply for a term loan for these
types of purchases, where the debt can be
spread over a longer period of time and
rates are generally lower than a line of
credit.
A line of credit also should not be used to
bail a company out of financial trouble. If a
business asks for a line of credit for this
reason, they will be turned down by the
financial institution. Businesses should be
thinking about a line of credit long before
they have run into cash flow issues. But if
a business owner is using the line of credit
to replace the absence of profitability —
instead of the absence of money coming in
from outstanding accounts receivables —
this is a recipe for digging himself or herself into a financial hole that may be hard
to get out of.
YVONNE STEWART is the assistant vice president and senior
business relationship manager for ViewPoint Bank, which is
headquartered in Plano. Reach her by e-mail at [email protected]. or at (972) 509-2020 ext. 7352. Reach
the bank at www.viewpointbank.com.
