Getting a Line of Credit is a big step for any business. It means you’re growing and need some additional capital to continue growing. Working with the bank will also give you an opportunity to better understand your business and gain a perspective on how people outside your company view your firm and industry.
- Understand what a Line of Credit is – A Line of Credit is a commitment and loan that is secured by your accounts receivable. It’s a great way to increase capital at a low cost; however, since it is secured by your accounts receivable, if there is a problem, the bank may have the right to step in and collect the cash directly from your customers. It will contain certain limits and covenants (conditions) that you will need to understand and maintain throughout the term of the commitment. Also, it should “revolve” i.e. go up and down, a line is intended to finance short-term fluctuations and needs but should not be viewed as a long term loan.
- Learn the terms your banker will be throwing around – Do your homework on the terms so you can have a meaningful conversation. You’ll hear things like “borrowing base,” “advance rate,” “cross aging,” “concentration,” “EBITDA” and a variety of other terms. Let your fingers do the walking on this; spending an hour or two researching things on the internet will probably give you what you need.
- Make sure your financial statements are accurate and in accordance with GAAP – The first thing bankers will want to see are your financial statements. Ideally your statements will at least be “Reviewed” or perhaps “Audited”; this is the standard for larger loans. Having things right the first time demonstrates that you’re on top of your business and sets the right tone with your banker. My banking contacts have shared many financial statements issues that they have seen when owners applied for a line. Ultimately 99% of these businesses were unable to get the credit they need.
- Have a solid forecast in place – You need to have a very tight, near-term forecast as well as a solid business plan for the next 18 – 24 months. Your banker will want to see what your expectations are for the future. More important is for you to have a forecast that will allow you to evaluate the covenants that will come with your loan. If you know you have a major capital purchase coming up or you are heading into your down season having this upfront and modeling the covenants will save you and your banker a lot of stress.
- Talk to your banker with confidence – If you have steps 1 – 4 completed you are prepared for this step. Remember this is a negotiation; if you know your stuff you can get certain provisions changed in a way that is comfortable for both parties. If you see a problem now or, based on your forecast, a potential problem in the future, talk to your banker, most of the covenants have some flexibility, and you’ll impress them with your knowledge of the business. Also, keep in mind that getting that last 0.10% savings on the interest rate may be less important than getting workable covenants and lower fees.
One final point is that the time to get a loan is when you don’t need it. Coming in as a well-financed, thriving business will give you a much better shot than waiting until you need the cash immediately.
Helping our clients access bank financing is part of what B2B CFO® Partners do day in and day out. I’ve built relationships with a wide range of Metro-Phoenix banks and have years of experience forecasting, setting up GAAP compliant financials, and working through reviews and audits with external accounting firms. If you need some help, give me a call or drop me a note; I’d enjoy hearing more about your business.