Many business owners are reviewing bank line of credit options with the recent instability in the banking industry.  Managing lines of credit is essential for the long term success of a business.  Here are some conditions business owners should keep their eyes on when utilizing a bank line of credit:

  • Most lines of credit are based on a variable interest rate…this means every time the Fed hikes rates then the debt being carried on the line of credit gets more expensive.
  • A bank line of credit typically has blanket lien provisions. This means a business is putting up all their company’s assets as collateral for the line of credit.
  • What would happen if the line of credit was called? Business owners should revisit all contracts executed for lines of credit. If the bank can force a payoff (“call the note”) if the business can’t come up with the capital to pay off the note, the bank has the ability to take all the business’ assets under their blanket lien provision.
  • If securing a bank line of credit requires a monthly minimum bank balance or requires that a certain amount of funds are held in a CD, then in reality a business is giving the bank extra capital to borrow against their line of credit. Why tie up working capital with a 3% return when the bank is loaning the business that same money back at over 7%.
  • Any line of credit is considered current debt and can limit a company’s ability to secure funding in the future. Lines of credit are great to have available in case of a short term emergency but should not be used to fund long term assets such as a building expansion or equipment purchase.

Another option to consider would be to use leasing for equipment purchases and a bank line of credit for operational expenses.  Here are some of the benefits of leasing:

  • The only collateral secured is the equipment being purchased and there are no forced payoff provisions or blanket liens.
  • Payments are fixed over the term and upfront cash requirements are minimal. With the long term value of the US dollar forecasted to drop your payments in essence are getting cheaper over time….pick the longest term possible that offers you a fixed payment.

In conclusion, while a bank line of credit can be a valuable tool for a business, it’s important for business owners to carefully consider the conditions and potential risks involved. Exploring alternative options such as leasing for equipment purchases can also provide benefits and flexibility for long-term success. Ultimately, understanding all available options and making informed decisions is key for managing financial health and growth.