Sam Silverstein, founder of PrimeTime Duplication, can’t imagine running his business without a line of credit. In fact, even before serving his first customer, he signed for a six-figure credit line with his bank. It was his first official act as a business owner.
Says Silverstein, “The two main reasons people fail in business are because they don’t have proper financing and they don’t have proper planning. A line of credit can help with both those things.”
PrimeTime Duplication edits and duplicates CDs and DVDs for a variety of clients. It also sells high-end duplication equipment that retails for about $50,000.
Silverstein had operated several other businesses in the past, so the bank knew his track record and was eager to extend credit. But even new businesses should follow his lead and open a line of credit from inception, advises Marco Carbajo, founder of UCan2, a national credit consulting company, and author of Eight Steps to Ultimate Business Credit.
“You never want to wait until you need the money,” says Carbajo. “Banks love to see startups and they want to help your business grow.” Most new businesses can get a $50,000 line of credit based solely on the founder’s good personal credit and banking history. For larger amounts, banks will ask new business owners to pledge personal assets against the credit line, such as a home or other property.
For companies that have been operational for a while, the first thing banks check is their business credit history. That’s why it’s so important to register with a credit bureau like Dun & Bradstreet and start building business credit, adds Carbajo.
Why is a credit line so important to PrimeTime? Two words: cash flow. Some weeks PrimeTime has more money in the bank than others. When cash is short, Silverstein turns to a line of credit to pay the bills and cover his expenses.
“I pay my bills every Friday, no matter what,” he says. “The line of credit enables us to have superior relationships with our suppliers because they know we always pay on time.”
Even though PrimeTime isn’t a big business, it gets treated like one. Silverstein recalls a time when there was a scarcity of materials in the marketplace. Suppliers were picking and choosing their customers, but PrimeTime got every one of its shipments because it had never missed a payment.
Suppliers are also more willing to negotiate better prices with PrimeTime because of its history of paying bills in a timely manner. In one case, PrimeTime had the opportunity to buy $20,000 worth of blank CDs at a greatly discounted price — but it had to pay for them within a week.
“I didn’t have the cash in the bank but I was able to draw on my line of credit,” recalls Silverstein, who is also a well-known business speaker and the author of No More Excuses: The Five Accountabilities for Personal and Organizational Growth.
It’s also critical for a business like PrimeTime to ensure that its suppliers are reporting those prompt payments to a credit bureau like Dun & Bradstreet, says Carbajo. “That’s how you raise your business credit score and ultimately increase your credit line.”
Silverstein says just as important is actively using that line of credit and then paying it off promptly. This has strengthened his position with his bank. How so? At the end of each fiscal year, the bank’s loan committee decides whether to renew his credit line. If they see steady activity and balances that are paid off in a timely fashion, they’re more likely to renew his line and possibly even increase the borrowing limit.
And since the line of credit must be paid back with interest, Silverstein has set up his checking account so that any interest owed is automatically deducted from his checking account every month. This means he never misses an interest payment and never has to pay late fees.
Carbajo says you should pay down a credit line in chunks and always pay more than the minimum amount. “Ideally, 90 days is a good time to pay it back, and maybe six months at the most,” he says. “After that the interest payments become too unwieldy.”
It’s also critical not to misuse the credit line, warns Silverstein. “The sole purpose of a line of credit is to manage cash flow,” he says. “It’s short-term debt that should be used for short-term commitments. It absolutely should not be used for expensive purchases that will take years to pay off.”
Why? Because it’s bad fiscal management to carry those interest payments over an extended period. “If you need to buy new equipment, then something like lease financing is much more beneficial,” explains Carbajo.
Landing a Line of Credit
How do you get a line of credit? The first step, says Silverstein, is having your personal finances in order. The bank will want to see a variety of documentation, including personal finance statements, income statements, a business plan, tax returns and cash flow reports. It may even ask you to pledge personal assets against your business line of credit.
Equally essential is developing a good relationship with your local banker. Silverstein advises entrepreneurs to make a point of going into the branch and meeting the bank manager face to face. “You have to be seen by the bankers at your branch. Remember, you’re courting them as much as they’re courting you,” he says.
This personal relationship has paid off for Silverstein during the current credit crunch. While many business owners have had their lines of credit cut or canceled outright, Silverstein’s has remained intact. At one point, when Silverstein’s bank was going to charge him $300 to renew his line of credit, he had a quick conversation with his branch manager and the fee was waived.
Another benefit of a personal relationship is that your banker is more likely to go to bat for you. “If something is not working, your banker will want to come up with creative ways to make it work,” says Carbajo.
“My line of credit is a lifesaver,” Silverstein concludes. “It allows me to run my business in a professional manner and helps me sleep soundly at night.”