Cleaning Up Your Credit Line

Our Credit Line has an annual requirement to get out of the line for 30 days, and that time-frame is nearing. We’re doing a lot better this year than last year; it’s mostly a timing issue. I’m not confident we can clean up the credit line within the 12 months, as our bank requires. What should I do?

 Thoughts of the Day: Credit Lines are meant to be used periodically, not constantly. Consider a term loan. Plan out your financial needs for the coming year; as the business ramps up, cash flow is likely to dry up. Plan for it.

 Credit lines are designed to help a business manage through ups and downs, to back stop cash flow cycles. Appropriate uses of the credit line might include getting over a short term up-tick in account receivables and acquiring inventory or services in advance of billing it out on a new contract.

 As with all credit instruments lines should be used in anticipation of greater profits down stream. In other words, use the credit line to boost invoicing opportunity and to manage expenses and cash flow until that money comes in.

 Using a credit line to manage losses is a bad idea. Keeping a line drawn down without understanding why you can’t seem to pay it off is also a bad idea. Borrowing to smooth over losses only leads to more problems later on. Now you owe both principal and interest, losses mean you don’t have the funds to pay off your obligations.

 One option for dealing with the clean up period is to ask the bank to term out the line. This means you won’t have to come up with all of the funds to get out of the credit line right away. Before you ask for help from the bank, take a look at this past year’s performance. Has the business been profitable overall? Is it likely to be profitable in the coming year? If so, ask the bank to work with you.

 Discuss converting the credit line to a 2, 3, or 4 year term loan. That way you can make regular payments every month while increasing the amount of time you have to pay down the principal. The advantage of a term loan is that you can work your way out of the principal your company owes, over time.

 You will have to go through another application process to get a term loan though. Be prepared to present personal and business financials, and tax returns. Stop struggling to manage a credit line that is no longer being used for short term borrowing needs. Instead, show the bank you are pro-actively managing the company’s financial responsibilities by making arrangements to pay down the principal owed.

 The bank wants you to be predictable, and responsible. Be ready to show them your growth plan, forecast of prospects in the cue, as well as your budget, and forecasted revenue for the upcoming year. Show them how your company plans to pay off the loan by increasing revenue, and managing its loan obligations over time.

 Keep in mind that as any business ramps up sales, cash flow can dry up. Advance payments for additional staff, inventory, services, equipment, etc. all tie up funds. Clients are waiting for you to finish work before they will accept and authorize payment on final invoices. Once invoices are authorized, some buyers may stretch out payment for another 30 to 60 days or more. Meanwhile the bills continue. However, one the work is completed there should be more than enough profits to pay off all obligations and to put aside reserves for the future. Make sure this is the scenario you’re dealing with. If you’re not sure, get someone to help you figure it out, fast!


 Looking for a good book? The Rational Guide to Building Small Business Credit, by Barbara Weltman.