There is a window of opportunity waiting for you at your bank! Even if you don’t need more money today, take strategic advantage of today’s favorable banking climate. Low interest rates together with excess cash at most banks means terrific opportunity. Here’s what we recommend:
Set up an acquisition credit line – If you intend to grow your company through acquisitions, have your bank reserve a line of credit for you for that purpose now, even if you don’t have a specific deal on the horizon. This type of a line will give you the flexibility you need to move quickly on acquisitions when they occur. Openly discuss with your banker acquisition criteria plus their thoughts for draw requirements on this line. For sizeable family businesses, this line will allow you to make multiple acquisitions during the year to be converted to normal long-term notes before your company’s year-end. (Note – term out is critical. You don’t want to ruin your current ratio buying a bunch of long-term assets with debt that still shows up as short-term at year end!) You can choose to consolidate the entire year’s purchases into one note, or for collateral purposes, can opt for separate notes. Be sure your desires are negotiated up front and spelled out in your loan agreement. Written documents take precedent so read the fine print.
Set up an equipment line of credit – If you intend to buy equipment or trucks over the next year, ask for an equipment line of credit. The line amount will be determined by expected purchases. Most banks are comfortable lending at 75% of cost, so keep that advance rate in mind. As you make approved purchases (define what “approved” is up front with your banker), you simply fax your invoices to the bank and get reimbursement. The line should be converted to a term loan, usually with a five-year payout, shortly before your fiscal year-end. You want to position your request so that the bank knows this line will become an ordinary course of business transaction, available to you year after year, similar to your revolving line of credit.
Consolidate current term debts – Because interest rates are low, now is a great time to consolidate all your small notes into one loan at a terrific fixed rate. Yes, in today’s market, we think fixed rates on anything five years or more in term is the way to go.
Renegotiate your working capital line – If price spikes left you maxing your working capital line, now is a great time to fix it. Do this in one of two ways. First, you can simply request a larger line. Better yet, term out the portion of the line that never seems to go away. For instance, if you have a $1,000,000 line limit, and never seem able to pay down to anything less than $450,000, leave the line at $1,000,000, but have your bank term out the $450,000 into a five-year note at a low fixed interest rate. That’s a win-win deal for both of you.
Finally, it’s the total cost of borrowing that counts, not just rate. Be on guard for fees, documentation costs, etc. Let your banker know up front you expect minimized transaction costs. If he’s eager to lend, as most bankers are today, he’ll work with you.
