This article follows up our previous post titled, "What’s Holding Up Your Small Business Loan?"
Get your CPA or trusted advisor involved
This response is the number one step bankers told us they want their clients would take. As obvious as it seems to advise a business owner to follow their loan covenants, the terms and conditions of your loan on your business may not be as obvious. Your CPA’s input is immensely important in creating a repayment plan.
“So many clients don’t review their covenants with their CPAs even though I try to coordinate a pretax planning call between all of us.”
Furthermore, the advice of your CPA can be invaluable in creating opportunities for early repayment and planning for contingencies.
“Review what you have NOW in area of credit facilities and review rates/terms for short term feasibility and PLAN for future working capital needs for the next 3, 5 and 7 years while rates are where they are…LOW!!! BUDGET for the payments and plan for [what you will need].”
The bottom line is that you need not only to plan, but to continue revisiting your plan and adjusting as you go.
“If your budgeting determines you are on the verge of issues, work with your advisors on a plan of attack to stop the bleeding or change course so progress can be made. Be honest with your advisors and yourself.”
Stay involved with your banker
This advice goes further than the required reporting required by your bank, although that’s important as well. Bankers don’t want a loan default and want you to succeed as much as you do. Many people would be surprised how helpful their local banker is willing to be when the client is just honest with them.
“I am always impressed and grateful when clients proactively discuss anticipated issues or needed changes with me well before they happen. For example, if the customer obtains a large, new customer and needs an increase in their line to support the growth, I am able to service them much better the earlier that they let me know. Getting a call a few days before a change is needed is much more difficult.”
Use the credit facility as intended
There is logic behind different structures offered on different loans or lines of credit. Debt carries an unfortunate stigma, but if you let it serve its intended purpose then it should help, not hinder, your business. With that in mind, let your loan be used in the capacity it was approved.
“If a line of credit, I want to see the business use it correctly by drawing down funds and then paying them back once receivables come in – it needs to revolve. For term debt, simply following what the documents say i.e. provide timely financial statements, never go past due, etc.”
In addition to letting a line of credit (LOC) revolve, this also means using an LOC for working capital and term debt for capital expenditures.
“If a capital expenditure is needed, approach the bank to request separate financing to avoid funding the line with a capital need which also keeps working capital available on the facility and doesn’t create “stale” balances.”
And don’t sweat the stigma of debt. Use it correctly to your advantage.
“If a business owner realizes that paying a nominal amount in interest can in return allow the business to negotiate better terms for paying sooner with their supplier – why wouldn’t they do that?”