Money IQ: Business Lines of Credit

Money IQ
Business Lines of Credit

Is your business prepared for a month of slow sales? Or are you checking the mail every day for that large payment from one of your clients – the client that informed you “the check is in the mail” – and your payroll is two days away. 

An operating line of credit is an essential part of many businesses, large and small. Having regular access to funds through a line of credit can assist you through slow periods or carry your expenses while you wait for that large check to come in.   

A line of credit is a short term loan that is structured to assist businesses with cash flow and operating needs. The line of credit can revolve (go up or down) during the term of the loan depending on your business cycle needs. These loans are generally secured by short term assets such as accounts receivable, inventory, work in process or other short term assets. 

This type of loan product is designed to revolve throughout its term and the borrower should expect to pay the loan to a zero balance regularly, or at least for a prescribed period of time during the term of the loan. The line is available to you to carry your business through low cash periods and should be paid off when the cash event occurs (the client payment arrives) or when you have accumulated the cash resources to pay the note down to zero.  

Financial institutions like to see several things during the term of the loan, primarily that the line of credit does revolve and ideally that you have the capacity to convert your short term assets into a sufficient amount of cash to “rest” (pay to zero balance) the line of credit. 

As a business owner you can expect to provide the financial institution with a regular listing of your accounts receivable reports, inventory listings or other assets that secure the line of credit and compile this information into a Borrowing Base Certificate that summarizes the data. At inception or application period, you will most likely be asked for two to three years of tax returns for both you and your business.

A line of credit rarely exceeds one year in maturity so you can expect to be required to go through a renewal process should you want to maintain the line.

Financial institutions vary in application and underwriting criteria including rate, term and collateral so be sure to shop and compare to find the product that works best for you and your business. Call your local financial institution to inquire about their business line of credit products. 

Editor’s note: Al Hernandez is a Senior Commercial Banker with Los Alamos National Bank and currently runs the Albuquerque market for the bank. Al has over 23 years of banking experience that includes running banks and commercial lending.

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