Bramble Berry’s line of credit came due last week and I’ve been diligently working to get the paperwork together to renew our line of credit. This morning, the line of credit was renewed at terms I was pleased with.
Why a line of credit? You can use personal credit cards to finance your business but it gets expensive. Credit cards charge around 9% (for those with extraordinary credit!) to 22% interest rate. That’s an expensive way to finance your business. A line of credit from the bank will be anywhere between prime +.5% to prime + 2.5% (depending on your creditworthiness). Right now, you can get a line of credit for around 4.5% interest. No matter how you look at it, that’s less than your credit card.
Also, lines of credit come due once a year. Ideally, you should be utilizing your lines of credit actively and paying your line of credit down to $0 many times per year. However, it does not come ‘due’ monthly like a credit card, leaving your cash for when its convenient for you to pay the line. One caveat: a line of credit is not meant to finance large capital expenses (like a new vacuum forming machine or forklift, for example). Credit lines are meant to augment your normal cash flow situation.
For example, if you get a big order from a national chain and the national chain offers you ‘Net 90’ terms (meaning, they will pay you for your order 90 days after receiving it), you will need to find a way to order all the raw materials, make the product, ship the product and then wait the 90 days to get paid. Most small businesses do not have that kind of cash on hand.
A line of credit will help you through this cash flow crunch more cheaply than a traditional credit card.
What do you need to receive a line of credit? To get a line of credit, the bank wants to know that you have a business plan, assets to back up the line of credit and strong financials. You’ll want to go to the bank that you have your business (and/or personal) accounts with. Make an appointment with the Business Center or Business Banker to discuss a line of credit. Hopefully, this is not the first time they have seen you. Ideally, you have been dropping off care packages to them every quarter or at least every year to make sure the bankers know who you are.
To establish your first line of credit, you will need:
1. Three years of personal and business tax returns. If you don’t have three years of business returns, it’s okay. Bring three years of personal tax returns.
2. A personal asset sheet. This is a document that lists all of your assets (bank accounts, stock holdings, cars, properties) and all of your liabilities (mortgages, credit card debt, notes payable to friends or family). Even though Bramble Berry is established and has a strong financial history, the bank still asks for my personal asset list every year because ultimately, they want you to personally guarantee the money they’re lending your business.
3. Your business plan. It’s okay if you don’t have a business plan right now. You will need one to show to the bank. Don’t be surprised if your banker also wants to come see your studio in action. Our banker visits our warehouse routinely to confirm that the inventory we claim we have is here, to make sure that things are operating like I say they are and to keep our relationship up-to-date. If you don’t have a business plan, here’s the link to a simple series I designed on writing a business plan for you to get started right away.
4. A well rehearsed, confident answer on why you need a line of credit. Banks do not give lines of credit to be nice, because you think you deserve one or because you suspect you have a great plan. Just as luck favors the prepared, so do bankers.
I was turned down a few times from large, national banks before a local bank finally took a chance on me. So, if at first you don’t succeed, try again and keep going to smaller, more local banks until you find a bank that is excited about your business, your plans for the future and wants to work with you.
It’s up to you to have a business plan that makes sense and is bankable. No bank, no matter how local, will just give you money because they like you. You have to maintain a compelling reason for them to keep lending to you. That’s why lines of credit need to be renewed yearly – to ensure that the business rationale for lending to you remains the same. I make sure to keep that relationship working well by meeting with our bank quarterly to update them on our profit and loss, any new business plans and drop off bars of soap as a ‘thank you’ for their trust in me and the Bramble Berry family of companies.
As you grow, a line of credit is essential to your repertoire of tools for success. Start working on establishing one today.