Lines of Credit: Support the Short-Term Cash Needs of Your Business
See how to work with your banker to find the right line of credit
Share current LOB: small-business-banking
[Joe Borowski] A line of credit is used to support short-term cash needs. Basically working capital. The customer can advance off the line of credit, pay bills, maybe they're gonna pay the rent, they're gonna purchase inventory, they might even have to use it for payroll. In general, it supports the collection of accounts receivable or the sale of product and therefore the cash cycle.
A banker wants to know a number of things when a customer's looking for a line of credit. First off, they'd like to understand what the line of credit's gonna be used for. They'll want to understand what amount of line of credit the customer needs and how they determine that. Then they're gonna talk to the customer about how do they plan to use it and how do they plan to repay it at that point.
First and foremost, they're gonna want to talk to their banker about why they need the line of credit, what the purpose is. Then they're gonna want to talk to their banker about what's going on with the financial condition of the company. They can talk to them about the balance sheets, the liabilities of the company, and the net worth of the company. They'll want to talk about what's going on with their revenues. Are their revenues growing? What's happening with expenses? Are expenses under control? Are they growing? And then lastly, they'll want to talk about, is the company making a profit?
A banker's gonna want to see about two to three years of financial statements for the company. Those can be regular corporate prepared statements or tax returns. In addition, the banker's gonna want to take a look at an interim statement which shows the current financial position of the company. With a line of a credit, a bank's also gonna want to see an accounts receivable aging and an accounts payable aging. If there's a guarantor involved, the banker's gonna want to take a look at two years of personal tax returns as well as a personal financial statement.
Profit and loss statement is really the heart of what's going on with the company. Bankers want to understand really what's going on with their revenue. If you've got a growing market, a banker would expect to see growing revenues. They're gonna compare a couple years of financial statements and get a trend analysis is what they're gonna do. They're gonna look at the expenses in the company. They're gonna see is the owner taking all the cash out of the company through the expenses? Or is he leaving cash in the company in order to support growth through the retention of profits?
Lines of credit are used for short-term cash needs. When you're doing a term loan, you're really looking at a longer repayment cycle. Maybe you're purchasing some type of fixed asset.
In manufacturing, they're gonna use that line of credit to purchase inventory, to buy supplies for the manufacturing process. They're gonna convert that manufacturing into a product that's gonna sell, create accounts receivable, which the line of credit is supporting and when that accounts receivable is collected, the cash is used to reduce the line of credit.
Finding the right line of credit can be the key to financing your business's growth. Learn what you need to know to secure credit.
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