When is a line more than just another line?

As published in the Lowell Sun - January 10, 2013
By Therese Espinola

Is a line just a line?

Fall has arrived and the smell of freshly baked apple cider donuts is in the air. It is a time for apple picking and leisurely walks through the woods. But for some business owners it is much more than that. For entrepreneurs the fall season is a time to refocus. It is a time of preparation and strategic planning for the busy holiday season ahead. For some business owners it may be time to ramp up inventory and for others it may be time to implement an expansion plan to meet increased demand. The question is how do you go about raising the money to fund these times of preparation and build-up? Do you deplete your cash and liquidity? Or… is there another option out there?

Yes there is!

A line of credit can be a flexible way for a business to meet its short term cash needs. A line of credit can be used for operating capital, to build up inventory during seasonal time periods, and to support growth. A line of credit works similar to a credit card where the borrower has the ability to borrow and repay continuously throughout the loan period. When the business pays down the amount outstanding, that amount of credit becomes available for the business to use again. The big benefit of a line of credit is that you only borrow money when you need it and you only pay interest on the amount that you use.

Seasonal Lines of Credit:

Do you need to continually finance receivables? A revolving line of credit may be a good solution for you. Similar to a seasonal line of credit, a revolving line of credit provides a business the cash it needs to continue to grow. The purpose of a line of credit is to provide a temporary solution during times of varied cash flow needs throughout the year. With a line of credit, a business owner can avoid sacrificing future sales due to a lack in cash flow during times of build up. In other words, a line of credit can aid a business owner during timing differences between when expenses are paid and when receivables come in. The lender will set a maximum amount that the business is allowed to borrow at any one time. The interest rate is variable and the interest on amount drawn is payable on a monthly basis. Since revolving lines are for short term cash flow needs and are not for permanent capital, the lender will typically require an annual payout. The bank will expect the business to pay off the line completely and keep the line at a zero balance for thirty days out of the year.

Asset Based Lines of Credit:

Lines of credit are typically secured by a company’s assets. The lender will create a borrowing base certificate, which is a formula that determines how much a business can borrow at any given time. The borrowing base will be structured so that the company can borrow a percentage of the value of their accounts receivable and in certain cases inventory. The percentage will depend on the asset type and overall quality. With an asset based line of credit, the lender will typically require a field examination, essentially a review by an outside auditor to test the quality of the accounts receivable, inventory, and other assets as well as the general conditions of the company’s reporting capabilities. In some instances an appraisal may be required to determine the true value of the assets.

A line is much more than just a line!

Lines of credit are typically secured by a company’s assets. The lender will create a borrowing base certificate, which is a formula that determines how much a business can borrow at any given time. The borrowing base will be structured so that the company can borrow a percentage of the value of their accounts receivable and in certain cases inventory. The percentage will depend on the asset type and overall quality. With an asset based line of credit, the lender will typically require a field examination, essentially a review by an outside auditor to test the quality of the accounts receivable, inventory, and other assets as well as the general conditions of the company’s reporting capabilities. In some instances an appraisal may be required to determine the true value of the assets.

A line is much more than just a line!

Many entrepreneurs are depleting their savings, using personal credit cards with high interest rates, and taking loans from family and friends to finance the growth of their business. But there are other solutions for your financing needs. Lines of credit are available to help you manage your cash and ultimately grow your business. My advice would be to look for a lender that is willing to work with you and inform you of the different financing options that are available. The more informed you are the better your decisions will be!

Good luck with the harvest season at hand!

Theresa Espinola is a Commercial Lending Officer at Enterprise Bank in Lowell. She can be reached at 978 656 5734 or via email – Theresa.espinola@ebtc.com

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