Every business owner knows that the cash coming in doesn’t always match up with the cash going out. This is especially true for start-up businesses or seasonal businesses. Without the necessary cash reserves to ride out the tough times, many business owners have been forced to shut down businesses that were making money on paper.
Lines of credit help meet the natural cash fluctuations you will encounter. Establishing a line of credit will allow you to advertise for a sale, stock up on inventory, and collect your receivables. This process can easily take 60 to 90 days. During that time, your employees, landlord, and vendors still expect to get paid. A line of credit gives you the cash you need to wait until the cash you are owed shows up at the end of the sales process.
You should start talking to your banker about setting up a line of credit long before you need it. In fact, you should check with your banker before you start your business.
I often see businesses that are doing well but are looking at expanding, or taking on a big contract. It is possible to grow your business right into bankruptcy if you don’t have a cash flow budget.
Your credit must be good and the business must have a history of profits to get an unsecured credit line. Most businesses can get a secured line of credit based on their receivables and/or inventory balances. Contract financing is an excellent program the Small Business Administration offers. Many small business owners do not have the cash reserves to take on large contracts. Contract financing allows you to buy materials and pay your employees during the time that you are doing the work but have not yet received payment.
Once you get a credit line, use it and repay it promptly. After a year, call and get the credit line increased. Do this with at least two banks. The recent economic problems are a good reason why it never hurts to have a strong credit line available before you need it.