Dealing with Credit – How to Expand Your Line
Maybe you are purchasing a new piece of equipment. Or maybe you’re even opening a new location. Either way, it might mean you need to expand your line of credit.
Rule #1 – We live in a new world. No matter what your experience has been previously, the rules have changed. There are much tighter views being taken on credit and the requirements are definitely increasing. So expect it to be more difficult and be prepared to share more information.
Rule #2 – Get credit capacity before you need it. Financial institutions loan money based on a few factors. Like being profitable over time. Seems a little unfair doesn’t it? They expect us to make money every year? Yes they do. They also expect you to leave earnings in the business. That is called equity. And it is necessary to grow your credit capacity. If you spend it all or take it out there is no increased value in the company. Banks loan based on equity and past performance.
Rule #3 – Prepare to provide a lot more documentation. For a long time, many financial institutions loaned money based on character as much as facts. Those days are rapidly leaving us. You need financials and business plans and budgets and projections and a strong reason to convince them that you will pay back any funds you borrow. They will likely require a personal signature to get credit. It is not unfair or unusual.
Rule #4 – Make money. The bottom line is that it is important to run your company profitably. Look in the mirror and ask yourself if you would loan someone else money that has a profit structure like yours. Many business owners show a loss or very minor profit each year. That does not lead to a solid loan application. Your EBITDA % (Earnings Before Interest, Taxes, Depreciation, and Amortization) is critical – first to know and understand – but then to grow so you are accumulating some profits. That is why benchmarking is so critical to for business owners to participate in and understand. How can you improve if you are unsure how you are performing compared to others? Analyze your performance and make sure you are profitable.
Rule #5 – Be creative. There are ways to work around most credit situations. There are many alternative ways to structure deals so you don’t lose the opportunity. Get engaged as soon as you know the need may arise. It is always better to ask before you need it than to be scrambling when you are against a timeline.