web analytics

Categorized | Ask Score

Counselors to America’s small businesses

Establish a line of credit to manage the unexpected

A line 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 protecting 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 loan contract. Essentially, the line of credit is assurance by a bank that as long as your company is financially healthy, it can borrow money whenever it needs to.

This form of short-term borrowing is an excellent way to establish a relationship with 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 having this relationship, your banker can become a sort of silent partner, giving 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 and to pay operating costs-not to purchase equipment or real estate.

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.

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 over noncritical expenses, dividends and employee bonuses.

This is a key point for avoiding confusion and resentment over what your bank is willing to do for you. Some small business owners think the loan officer doesn’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 annual 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 off for between seven and 30 days each contract year.

To learn more about lines of credit, contact SCORE “Counselors to America’s Small Business.” More than 35 volunteer business counselors in the Grand Rapids SCORE office donate their time to consult with and mentor entrepreneurs (In person or Virtual). Contact the Grand Rapids SCORE office at 616/771-0305 or go to www.scoregr.org.

This post was written by:

- who has written 17238 posts on Cedar Springs Post Newspaper.


Contact the author

Leave a Reply

*

code

advert
Kent County Credit Union
Watson Rockford
Ray Winnie
Advertising Rates Brochure
Cedar Car Co

Archives

Get Your Copy of The Cedar Springs Post for just $40 a year!