Traditional Bank Business Lines: Tips to Keep Yours Humming

Since 2007, banks have been nervous about establishing working capital lines of credit for their business customers. Knowing some of the secrets of securing and using your line of credit will help make sure it is available for use when you need it.

Knowing what to use your credit line for is the first step. Most lines of credit are for working capital purposes. They are for helping you carry your accounts receivable, inventory, handle seasonality in your business, make payroll when accounts receivable is high and other purposes that are short-term. Short-term is defined by most banks (and accounting principals) as being less than one year.

To explain it as it relates to your company balance sheet, the current assets are short-term assets. The easiest way to think of using your working capital line of credit is to only spend money from the line of credit on assets that are short-term. Buying a large piece of equipment (a long-term asset) would be better financed with a lease or term loan that doesn’t exceed the purchased property life.

Most banks provide working capital lines of credit for short-term use and collateralize them with your company short-term assets. That means that they are loaning money primarily against the value of your short-term assets on your balance sheet, normally accounts receivable and inventory. Depending on circumstances, they may also add other assets to the base used to loan you money. Most use a borrowing base certificate which you provide to them when you make a draw on your line of credit. 

One of the standards banks use when approving lines of credit is that the commercial borrower is profitable and has sufficient free cash flow to repay the line of credit. Some banks also like to see the line of credit “rest” a few weeks a year. This helps “prove” that a business has adequate cash reserves beyond the line of credit. This usually won’t be a condition of the initial loan but if you do follow the resting principal it will be easier to get an increase in your credit limit in the future. 

One of the best ways to insure you always have access to a working capital line of credit is to know your bank and banker, and make sure they know you. If you are planning on applying for a line of credit, don’t wait until you need it to start the process. When your banker knows your business’ ups and downs and how you do business they are better able to make an affirmative decision on a loan of any kind. 

Part of knowing your bank is understanding how they make decisions on loans. Very few banks are exactly the same in policies and personality. Many banks won’t discuss how their lending process operates. 

Usually a line of credit is made for one year at a time. If you plan on keeping yours for more than a year, begin discussions with your banker at least a quarter before renewal. This is especially true if your business has suffered a hic-up or two during the current line of credit period.

Having a working capital line of credit requires some discipline. Once your business has shown that it can handle the customary requirements of a working capital line of credit it will likely be renewed and if your business needs a larger line, it will be easier to extend.

Sam Thacker is a partner in Austin Texas based Business Finance Solutions

Direct Email: sam@lesliethacker.com

Twitter: @SMBFinance