Banks nowadays are being pretty tight fisted with their
money especially when it comes to small businesses. I
recently talked to a friend of mine who is a Vice President
at Bank of Nevada in Las Vegas. The topic of the current
credit situation came up and I asked him how tight the
lending was. He said to me the only thing that the banks
really care about now is your Fico score. Even your company
financials are secondary to your score. He then mentioned
to me that the same principles are applying to renewals
that they apply to new applications. But some old
strategies can help your cause at renewal time provided
you've been applying them since the start.
So what does your bank want to see you doing? Well for
starters they want to see you using your credit line. The
purpose of a bank line of credit is to cover cash
shortfalls for small amounts of time. A bill needs to be
paid but your customer hasn't yet paid you. You draw on the
line and borrow the money you need to pay the bill. Once
you've been paid you pay the money back to the bank. Over
the life of the credit line you repeat this process
continuously. Borrow and repay is what they want to see.
Now you need to remember the golden rule about asking for
money. Ask when you don't need it. Then when you do need it
you already have it. Credit lines are meant to give you
short term flexibility. They should be used for ongoing
cash generating operations. They should not be used for
projects that may or may not see a return in the future.
Nor should you stretch your budget for projects that are
based on future returns thinking that you can use your
credit line to cover expenses.
That's the mistake a lot of small businesses make. Say they
find a piece of equipment they could use. Now they've done
just fine without this piece of equipment in the past but
for whatever reason they just have to have it. Maybe they
think it will improve productivity or that there is more
demand for its use than there actually is. But they don't
have enough money set aside to buy it and they can't
finance it. So they use money from there credit line to buy
it.
Well now we run into the problem. If your company didn't
have the money to buy the equipment outright without help
how then are you supposed to pay the credit line back down.
You see the second thing banks are always looking for is
your ability to pay the balance down to zero. They want to
know you have the ability to pay them back. And the more
times you borrow on the line and then pay it down to zero
the better you will look.
Now let's look at the other end of the spectrum. Your
company has plenty of money and doesn't need to use the
line. Use it anyway. You never know when your situation
might change and if you show your bank you don't actually
need the line they may not be inclined to renew it when it
comes time. Remember they're in business to make money too
and they only do that on money you've actually borrowed not
on the fact you have a credit line.
Credit lines can be of great help or cause major problems.
So don't treat it like you've just won a shopping spree
because you have to pay it back.
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Cash Miller is an experienced entrepreneur and speaker who
has spent over a decade as a small business owner. His
years of experience in small business cover such topics as
planning, management, marketing, human resources,
ecommerce, and taxation. If you are looking for more
information on this subject and others related to starting
and running a small business you can visit his website at
http://www.SmallBusinessDelivered.com
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