4 steps to get a business line of credit to power through volatility
Whether looking back at pandemic lessons or bracing for a possible recession, business owners can feel encouraged by a cushion of ready cash—a cushion they’ve built up in good times.
“The best time to get a line of credit is before you need it,” says Ami Kassar, CEO of business loan advisory Multifunding. “When a lot of businesses need it, those who’ve already arranged lines of credit tend to have an easier time.”
The Paycheck Protection Program launched in 2020 was a historic economic reaction to a global crisis in which the United States government extended $800 billion of relief to businesses.
But a proactive approach through a business line of credit, Kassar says, is an evergreen tactic that can act almost like an insurance policy.
He and his colleagues have noticed more companies this year facing cash-flow challenges—often due to delayed shipping or other supply-chain issues. Suppliers must be paid even when goods are stuck in port or backlogged on trucks.
“It’s probably a good time to make sure your liquidity is maximized because of all the unpredictability out there,” Kassar says.
He recommends four steps to pursue a business line of credit:
1. Look beyond 2022.
Forecast a range of business scenarios for the next year and beyond and what each might mean for your cash flow. For instance:
- Can you hire key talent that may be on the market for a limited time?
- Can you seize an opportunity for smart short-term growth? Disruptions also can deliver opportunities for how you handle things like real estate, digital commerce, and suppliers.
- Do you make a more defensive move, such as boosting inventory to guard against supply-chain snags?
2. Set your metric.
Establish a cash-flow threshold (if you haven’t already hit it) for when you’ll draw credit.
3. Get organized.
Be prepared to show three years of tax returns and your current financials when applying for a business line of credit.
4. Quantify your need.
How big a business line of credit should you consider? Kassar suggests the greater of:
- 10% of your topline sales, or
- 85% of your A/R (accounts receivable) and 50% of inventory.
A business line of credit can balance offense and defense, hedging your business risk with inflation and other factors while seizing growth opportunity as the pandemic ebbs. If you can envision what you’d do with that money and can forecast a feasible return on investment, why not pursue it?
A volatile economy doesn’t automatically mean it’s the wrong time to make a calculated move backed by a solid business line of credit. Sometimes that volatility provides your opening.
“Incredible innovations and opportunities come from crises,” Kassar says.
What about SBA loans?
The Small Business Administration (SBA) also can be an effective ally, Kassar says, by backing larger and riskier loans to help businesses weather a crisis. Two main lines of SBA credit:
- SBA Express: This SBA 7(a) loan has a maximum amount of $500,000 with a 50% guarantee. You should hear back on your application within 36 hours.
- CAPLines: This capital line of up to $5 million helps businesses with short-term or seasonal liquidity.
More from Kassar on the SBA: Three SBA programs you probably haven’t heard of and could be taking advantage of.
- Reach out to your trusted business financial professional or seek one through Principal.