23 Jul Why A Line of Credit?
It’s hard to believe that we are halfway through the year. There are so many things that we all want to accomplish. Now is a good time to review the business line of credit. When is the last time the business evaluated its line of credit? Have the needs and scope changed since you applied for it? This type of loan can be crucial to meet short-term cash needs and provide resources for expansion.
Growing businesses will experience cash shortages at certain times. These are typically caused by events that may not be anticipated. Some examples include: clients that are not paying bills on time, the loss of a key account, the impact of price increases, or the ability to purchase inventory before a major price increase. A line of credit can help businesses weather these types of business events.
Lines of credit are great tools to help businesses make short term loans when needed. The most important thing to understand about a line of credit is that you must get one when you don’t need it. This may seem counterintuitive, but let me explain why.
We find that clients wait to talk to the bank until they need cash. In many instances, it will be too late to obtain a line of credit. This is because as part of the loan process, banks evaluate the business’s cash flow. They want to make sure the loan can be repaid. When a business is in a cash crunch, it is much harder to prove they have the cash flow to pay back the loan. So you want to put your best foot forward when setting up a line of credit, when the business is in good financial order.
Recently we helped a client increase their line of credit just in time to purchase materials before a major price increase that was happening in their industry. They were able to make material purchases without impacting the current cash flow needed for operations.
Some important things to remember when applying for a line of credit: not all banks are equal. If you are a growing company, the bank you started with may not have the treasury tools and resources you need to support your growing business. It may be time for a change.
For businesses that have been turned down for lines of credit by their bank, there can be several reasons. The most common reason is that the bank does not like your business risk. Banks have certain types of businesses and verticals that they will give loans to. The bank may not do deals with your type of business or your industry.
Shop around to at least three banks when looking for a line of credit. Get some competition going between the banks. Look for institutions that truly support your business vertical or industry. For help making sure you’re going after the right banks and the right amount for your line of credit, contact us.