A properly maintained line of credit can be a shock absorber for small businesses
I've heard the following from small business owners more times than I can count over the past few years: "Without available cash or credit to purchase new supplies or inventory, I will be at a competitive disadvantage or won't be able to make this work at all."
As sales slumped and expenses soared for many small businesses over the past few years, the temptation to use instant money to help businesses get by or stay afloat increased dramatically. Combined with the dearth of easy credit and declining property values, the types of loans that many businesses had been relying on were no longer available, and property values no longer supported an equity line in addition to a primary mortgage.
Enter the business line of credit, with its low rate of interest and interest-only payments, as (what seemed to be) the best and sometimes only viable and readily available source of funds for down payments on property, equipment purchases, company vehicles or any number of business improvements. A business borrows with the intent of paying off the debt with "new" income earned from the purchase, but business owners haven't seen any pay-downs of the balance yet.
Not surprisingly, as the economic climate continues to fluctuate, the ability to pay off line-of-credit debt has been a challenge for some small business owners. The cash-flow machine of a business can become severely strained if the balance of a line of credit is not being paid back, or at least paid down, regularly by sizable amounts.
When used correctly, a business line of credit can help a business by providing fast and flexible access to credit used to finance working capital needs, such as accounts receivable and inventory. With flexible repayment terms, it gives a business the convenience of borrowing funds at any time. It also provides a sense of security that a business has a source of funds to pay bills or payroll while waiting to sell inventory or collect receivables.
Unfortunately, and all too often, the cash-flow troubles of an otherwise well-managed and profitable business can be traced back to either the lack of, or misuse of, a functional business line of credit.
A small business owner should think of a business line of credit as a shock absorber, functioning like the shocks on your vehicle. With well-maintained shocks in good condition, a smooth and comfortable ride (or as close as you can get) is more likely to occur on Maine roads full of frost heaves and challenging conditions.
In business, the line of credit smoothes out the bumps and changes in business cycles. Rather than "bouncing" money from one account to another to keep the cash flowing and the bills paid, a properly maintained line of credit "absorbs" the need for cash.
If you are constantly taking money from your business savings, operating accounts or other sources to pay short-term cash needs, consider placing a line of credit between the need and your cash. This way, the balance on the line of credit goes up and down instead of your deposit accounts. This translates into a stronger, well-maintained, consistent balance sheet.
As a business owner, you get advice like this from many sources, including accountants, attorneys, family and friends and the Internet. When it comes to questions about your business cash flow, your banker is the go-to expert. If a business is run without proper attention to cash-flow management, then it can be construed as more of a hobby than a business — something you enjoy doing and make a little money at, but with not a lot of focus on growth and overall success. If you seek to grow the business, expert advice from a (business) banker can help.
If you are experiencing cash-flow issues, make an appointment to speak with your banker sooner rather than later. There are many options your banker can consider to leverage business collateral and equity to fix many cash-flow problems.
Also, if you plan on making any changes to your current debt structure or have not recently reviewed your business with your banker, make it a priority to do so. Regular inspection and the occasional "financial tune-up" give you peace of mind to concentrate on the ever-changing conditions of business operations.
Like maintaining a vehicle, keeping your business on the road involves proper regular examination and maintenance. Using a business line of credit correctly as a short-term solution will help keep you and your business on the road to success.
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