How to Manage & Grow Your Business with a Line of Credit
Article By: Jacob Bauer, Commercial Portfolio Manager
Many of us have heard the phrase, "Cash is King". This phrase became popular following the 1987 stock market crash by Peter Gyllenhammar, CEO of Volvo, but still holds true today. Many of us walk around today with little or no cash in our pockets, and everything we buy is via credit, most commonly, the credit card. Credit cards have become very common with daily operating expenses for businesses, but is it the right product to use to for managing assets?
A revolving line of credit (RLOC) can provide your company additional insurance in the times of uncertainty, provide the capital needed to ease the pains of growing, and be used to balance the ongoing game of cash flow. This product usually allows for more credit and a lower interest rate than a traditional credit card. Manufacturing, wholesale, retail, and service industries all have ways to gain access to this cash through equity in more liquid balance sheet items such as inventory and accounts receivables - and even sometimes through less liquid items like equipment and real estate. By using this leveraging strategy, a business increases its ability to grow, preserve cash, and monitor its operations.
You also may have heard the statement that tangible assets such as equipment and tooling should not be purchased via a line of credit unless you expect to pay it off in less than one year. Well, we may have a product that "somewhat" disproves that belief and could be a perfect fit for you and your business.
Revolving-term line of credit (RTLOC), although sounding like an oxymoron, is a great tool to easily move equipment or other tangible assets in and out of your company. The premise of a RTLOC, is that you will have set payments based on the size and amortization of the loan. The term is for one year, and the amortization typically ranges between three and five years. One of the key differences of this product versus a RLOC is this is an amortizing loan, not an interest only loan, building equity with your assets. The benefit is that it allows you to purchase equipment via financing without needing to receive an approval with each purchase. These lines are traditionally secured by existing assets and/or assets being purchased, using advance rates from 30% - 80% depending on how the asset is valued. These RTLOCs may be paid down via selling equipment or applying extra payments without penalty, and it can be re-advanced up to the approved loan amount with purchases throughout the term. An ancillary benefit of this type of loan structure is it also helps with budgeting and cash flow management.
Please reach out to your SFB lender to discuss these options for your business and see if either or both may be a great fit for you!
As a commercial portfolio manager, Jacob Bauer assists in structuring deposit and loan products to meet the unique needs of his clients. He has experience with small business loans as well as financing the purchase of existing businesses and real estate investments. For more information, Jacob can be reached at 715-930-7880.