In a perfect world of small business everyone pays on time and there are never any disputes over invoices. As you can imagine this is not always the case. What happens when you didn’t get the check that was ‘in the mail?’ For most small businesses this is a very real possibility and it’s a serious problem.
How do you come up with the scratch in the meantime?
Can you title loan your car or sell personal belongings? This has certainly been done before but it’s not the best solution. The best way to avoid a funds disaster it to plan ahead for these emergencies. Trying to find the money at the last minute means you’ll be stuck borrowing from friends or using credit cards.
Neither is ideal.
We’ve used plenty of credit cards in our past and take it from us; it’s not a good idea. The interest is a killer and the liquidity stinks. You’ll find yourself getting behind and with the interest building it gets more and more difficult to pay off the balances.
The best way to solve a cash flow problem is by planning ahead with your bank. They’re the best place to develop a long term solution to short term cash problems.
Our experience has shown us that finding a good locally-owned bank with VPs and presidents who live in your area can go a long way to supporting your business cash flow needs. They will understand small business and have the ability to make objective decisions on how best to help your company.
This type of loan is called a Small Business Line of Credit. It is not always easy to get and you’ll find it’s even harder when your company is less than a year old. The bank is going to want to see the history of your company’s financials. They want to see you have the ability to make and manage money. A startup can’t provide this proof. They will also want you to personally guarantee the loan and provide a personal financial statement. As a small business owner you’ll find that you’re putting together a personal financial statement at least once a year.
This line of credit will only be good for a year and then you’ll have to renew it with the bank. If you’ve been current on the payments and not broken any of the rules you should be good. If not, they may call the note and you’ll have to pay it all back immediately.
That would be no fun at all, game over!
A word of advice…
Use this line of credit as a way to cover short term cash crunches. This is not a long term loan. The bank doesn’t like to see the note go ‘evergreen.’ This means that you’ve borrowed up to the limit of the line and haven’t paid any back. They want to see you borrow some money for a little while and then pay it back. If you need a bunch of money for a long time you should be looking into a long term loan for equipment or property. A line of credit is not for these types of purchases, it’s for operating your business day to day. That means covering rent or salaries when receivables don’t show up on time.
As with any type of borrowing realize that the creditor now owns you to a certain degree. They’ll want regular profitability updates, tax returns and financial statements. This just goes with the territory. The nice thing about a line of credit is that you don’t actually have to use it. It’s just there as your safety net in a pinch.
Just make sure you don’t get tangled in your own net!