Line of Credit (LOC) Financing
By Sunrise Associates, Consultants
to Small Business Owners

Small businesses often require short term loans for specific cash needs. Many small businesses only think about cash when it is desperately needed. It is important to remember that banks only lend you money when you don’t need it. Chances are that when you Go to your friendly banker and tell him that you desperately need money today, the answer most often will be NO.

A Line of Credit (LOC) is known by many names. It could be a backup credit, open-end credit, overdraft protection, revolving line of credit, bank term loan, on-the-spot loan, home equity, or swingline loan. A line of credit can take many forms, but it is basically any credit facility extended to a business by a bank or financial institution to overcome liquidity problems.

Banks only give lines of credit to their most credit-worthy customers, and lines of credit come with fairly common terms and conditions. They are not loans, and banks expect them to be paid off quickly. They also expect balances to move up or down as needed. Financial arrangements extend a specific maximum amount of unsecured credit to a specific borrower for a specified time period. This is called the credit line.

In a small business, the line of credit is preferable to other options, such as relatives, credit cards or personal credit lines, because it is more economical. Interest rates are usually linked to prime or LIBOR rates. Often a small business relies upon multiple credit cards with interest rates between 12 and 24%. If prime is at 5%, bank rates for a line of credit may be only be 1 or 2 points over prime. Bank service and money availability are also more reliable than your aunt or parent.

All credit instruments demand collateral, so don’t be surprised if you must personally guarantee the loan and submit credit histories and personal financial statements to the bank. In addition, most covenants require monthly, quarterly or annual company financials and federal income tax statements.

Another surprise may be the “cleanup period.” Most LOCs will require a 30-day cleanup, where the balance must be reduced to zero. Sometimes the bank will allow a minimum draw-down instead. For example, if the line of credit was for $500,000, the drawdown might be $100,000 for at least 30 days. Remember that all terms are negotiable. Be sure to review bank loan documents with your lawyer, and take the time to shop the smaller business-oriented banks. The smaller banks are more flexible. They allow you to meet the President and the local decision makers, and they are often easier to deal with than the large national banks.

As you would expect, your presentation will make all the difference. Your financials controls, your ability to generate accurate and timely financial statements, your personal background and business experiences, and the appearance of your company will make or break the deal. Sunrise Associates understand the needs of local bankers and can assist you in preparing your presentation to your banker.