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Photo of Ami Kassar, John Rusk, and Andrew Hatzenbuhler.

A business line of credit could help cash flow when you need it most

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This could be called The Year of the Business Loan—not only in terms of the Paycheck Protection Program (PPP) but also for independent lines of credit pursued by businesses as a bridge through the pandemic.

“The best time to get a line of credit is when you don’t need it,” says Ami Kassar, CEO of business loan advisory Multifunding. “Unfortunately, now a lot of businesses need it, and it’s those that were more prepared and had good contingencies for lines of credit that are having an easier time.”

The Federal Reserve has tracked the tightening of business credit as owners continue to face an uncertain path to full recovery.

The challenge: Many businesses need access to a line of credit more than ever—even if they didn’t plan for it before the pandemic.

Kassar in general likes to see a business with access to a line of credit almost like an insurance policy, but he says to keep in mind these four rules of thumb:

  1. Forecast a range of business scenarios for the next year and what each might mean for your cash flow.
  2. Establish a cash-flow threshold (if you haven’t already hit it) for when you’ll draw credit.
  3. Be prepared to show three years of tax returns and your current financials when applying for credit.
  4. How big a line of credit should you consider? Kassar suggests the greater of these:
    • 10% of your topline sales
    • 85% of your A/R (accounts receivable) and 50% of EBITDA (earnings before interest, taxes, depreciation, and amortization)

Business loan case study: Rusk Renovations

One of Kassar’s clients, Rusk Renovations, is a family-owned general contractor in New York City, founded in 1987. Its 50 employees handle projects for wealthy clients in the heart of Manhattan. Like all of us, co-owner John Rusk was blindsided by the pandemic. It wasn’t until a few weeks before the first widespread shutdowns that he got his first inkling of trouble—one of his clients asked him to procure N95 face masks.

“‘I thought, ‘Well, that’s a funny thing,’” he says. “‘Why, is there a run on them?’”

Then, within a single weekend, nine of Rusk’s projects—all but one—stalled as buildings closed to outside traffic. Rusk has since navigated a year in which staff has been quarantined and supply chains have broken.

“The good thing is that our workforce stood by us, and our customers stood by us,” he says. “It was just a matter of moving forward in the way that we wanted to.”

His business secured a PPP loan and Economic Injury Disaster Loan to help replace lost revenue during a three-month shutdown. Rusk was able to keep projects in the pipeline and now seeks more liquidity through a private business loan to help pivot toward recovery.

“We really want to regain some of that positive energy we had coming off a really strong 2019,” says Andrew Hatzenbuhler, chief business officer.

What about SBA loans?

The Small Business Administration (SBA) also can be an effective ally, Ami Kassar says, by backing larger and riskier loans to help businesses weather a crisis. Two main lines of SBA credit:

  1. SBA Express: The CARES Act temporarily increased the maximum express loan from $350,000 to $1 million.
  2. CAPLines: This asset-based line of up to $5 million helps businesses with short-term or seasonal liquidity.

Rusk’s line of credit will help on two main fronts:

  1. The contractor can hire key project managers even if there might not be immediate work for them to generate revenue. “Some of our competitors are shedding great talent that otherwise would be locked into projects for years,” Hatzenbuhler says.
  2. Rusk can seize the opportunity for smart short-term growth. The pandemic has triggered turnover of prime urban real estate, spurring new renovations. Rusk, through a subcontractor, also has expertise in air and water purification—a timely niche that convinced the business to spend $25,000 on a website upgrade to tout that marketable specialty.

Approaching a line of credit both defensively and offensively—hedging your business risk while also seizing growth opportunity—is what Kassar routinely suggests to clients. He often walks business owners through a mental exercise:

Wand icon.

What if the tooth fairy dropped $1 million in your business checking account but said it would disappear in a month if you didn’t invest it in things you think would help your business?

If you can figure out what you’d do with that money and can forecast a feasible return on the investment, then why not pursue it?

“Incredible innovations and opportunities come from crises like this,” Kassar says.

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This podcast provides educational information only with the understanding that Principal® and its employees are not offering legal, accounting, investment or tax advice. Business owners should consult with their counsel or other advisors when making business decisions.

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