Are you negotiating the renewal of your commercial line of credit or are you planning to revise terms and conditions soon? Here are some practical tips:
- Analysis of the results and ratios of your company compared to the previous year:
- Explain the reasons for the sales evolution and not just the trend;
- Impact of the results on the gross margin and the profitability of the company;
- Explanation of management decisions and the impact on working capital – remember: “cash is king”;
- Management of the balance sheet by the good control of your capital (low versus high leverage);
- Respect for your debt obligations, in other words the company’s ability to pay back;
- Respect of the conditions demanded by your banker.
- Eligible amount and terms of use (may vary depending on several factors). Here are some guides:
The rules of the amount awarded: total sales multiplied by 10 to 15%. For example, sales of $ 3 million are equivalent to a $ 300,000 to $ 450,000 line of credit. This rule may vary depending on seasonality or industry. For the business line of credit you may consider it.
The margination rules:
- 75% of accounts receivable and the possibility of maximizing the advance rate on insured accounts receivable up to 90%;
- Up to 50% on the inventory of finished products and raw materials – some work in progress can even be financed;
- Evaluating the true value of your borrowing power: subtract from the availability of margination priority debts and property less than 30 days;
- The authorized amount of the line of credit rarely exceeds the equity amount of the business. On the other hand, there are types of financing that may allow you to deviate from this rule.
- Interest rates, renewal fees, tracking fees and guarantees:
Variables from one institution to another: However, it is important to understand that pricing, borrowing options and guarantees are based on the company’s structure and the risk associated with it.
Certain elements that can affect the risk of your business and have an impact on the interest rate and the expenses:
- The history of profitable profitability and the quality of management;
- Industry and business cycles;
- Financial decisions without consulting his banker. For example, buying fixed assets from the generated cash flow;
- Bad matching of debts – rule: always finance the long term with long term, and vice versa;
- Defects on the ratios and conditions to respect with your banker;
- advances to shareholders or related companies;
- Higher dividends than cash generated;
- Bad debts and obsolete inventories.
- To optimize the terms of your company’s line of credit:
Know your needs (cash budget and financial forecasts);
Consider your banker as a partner and be well prepared during the meeting.
