Powerful Business Strategies - Line of Credit

0:04 Hi, you have done too the sensue wow for. You your. This is the Pipe Man here on the Adventures Pipe Man W four c Y Radio and this is the positively pipe main segment of the Adventures of Pipe Man with our next step CFO Michael Barberita, who is going to give us some powerful business strategies. So welcome to the show, Michael, and let's talk about lines of credit. Thank you, Dan, thanks for having me so yeah, a line of credit. Now. You know, when I get a new client, one of the first questions you know, early on did I ask, is whether or not they have a line of credit?

0:51 And about I would say at least sixty percent of the time they do not. And that is a you, huge, huge mistake because, as everybody knows, business has its ups and downs, and you know, poo poo happens I as you probably already know. And part of that poo poo is, you know, poor cash flow due to whether it's economic conditions, whether it's just a seasonality thing, whether it's a bad sales week, whatever it may be. There's a million ways to have a cash flow dip, and most of them can be temporary. If you manage your cash flow properly, and so but be that as it may, you must must have access to align of credit. We're not asking you to go out and get a loan. We're asking you to get aligne of credit that doesn't have to be used if not needed, and you only pay about one hundred and fifty dollars a year to the banks that charge it. I have a couple I know of a couple of banks that don't charge anything for the align of credits. So you know, it's it's free to use, and that's the end of it, uh with you know, one big one fee up front, like four hundred dollars up front, and that's the end of it. So, but a line of credit is something that is just incredibly valuable.

2:15 And a rule of thumb, here's a rule of thumb of how much, because lots of times business owners ask, well, how much should I get for a line of credit? At a minimum ten percent of your annual sales at an absolute minimum I like to get. I like to try to go for fifteen percent. It depends upon your credit and your situation, you know. But but even if somebody should get let's say, a two million dollar business should have a two hundred thousand dollars line of credit and they can't get it, but they can get a fifty thousand dollars line of credit. I make sure they get at least a fifty thousand dollars line of credit because you've got to have it. It's very important. And you're not paying on an amount of money for it.

3:01 You're not paying interest on it until you use it. And you know, the other thing is is there's a proper way to use a line of credit, then there's an improper way. Number one, it's not an equipment loan. Sometimes business come up buy equipment with their line of credit and then the bank who has what's called a zero balance provision in most line of credit agreements, and a zero balance provision means that you've got to zero out your line in a period of twelve months. You've got to zero out your line of credit for thirty days. So if you're going to buy equipment with your line of credit, you're not going to zero out your line of credit, and that's going to cause problems. Now some for the most part, as long as you're making your interest payments, banks leave you alone. They let things carry forward.

3:49 But just wait till there's an economic crisis, and the bank is not to get pressure from the FED to start exercising their rights under these agreements like the zero balance provision. It's not calling in loans as a result of it. That's what happens. So you're going to use your line of credit for cash flow dips essentially and seasonality situations. Other than that, you really shouldn't use your line of credit to buy equipment or it's a fund operating losses. That's another mistake. Now if you think if operating loss is temporary, that's different. But if you think that, then you might go through a couple of years funding it operating loss to a line of credit. I know it's there. I know you'll probably do it, but it's not.

4:35 It's not a good idea. Not a good idea. Credit cards, that's right, stop making profit. And there are a variety of ways. We've talked a lot of strategies in the course of the show on how to go about increasing sales, increasing business, having better pricing strategies, up sells, down cells, cross sells. We've talked about strategic partners. If we talked a number of ways to increase sales, that's what you should be doing instead of funding your operating losses with a line of credit. So I have a question too that probably a lot of listeners are thinking of. Okay, so how hard is it to get this line of credit? Because I would think that it's much harder to get a business loan than personal loan, and I would think that a line of credit would be very hard to get because they know that you could make the mistakes that you were just talking about, and that puts you as more of a risk. And because it's a line of credit, like if you buy equipment, they don't have a lean on your equipment because it's a line of credit. So what's your advice and information about you know how solid it is?

5:51 And you have to be to get a line of credit for your business. So if I went to three days, okay, there'd be one bank that you'd have to be a an outstanding citizen. Okay, you have to you have a lot of profit. You have to show a lot of profit. They're going to put you through the wringer. There'll be another bank that has moderate requirements, and then they'll be there's a bank that has ice cream requirements. For example, let me give you an example of a bank in this local area that has ice cream requirements. You have to make at least one dollar or more in your last tax return, and and uh you, uh you, your sales have to be over like one hundred thousand dollars and you could qualify for as much as seventy five thousand dollars line of credit. That's the end of the underwriting.

6:42 Wow, So that. Okay, you have that. By the way, these are complacent banks who need loans. Let's call Spain. It's paid. This is what happens. Okay when times are tough, those terms are gone. Yeah, yeah, yeah, all right. Then you have those banks that, uh you know, have moderate requirements. Well, let's go back to the ice cream for a second. I like the ice cream. Yeah, so what I just I just go bring them some ice cream and they'll give me the loan. But how do you know which banks are the ice cream banks? You're gonna make calls? I guess they change because it's all about how much business they need, how much you know, if they need to loan money, that's all. It's about.

7:33 The more opportunities, the more credit lines that they give up, the more opportunities they have to loan money, the more risk they have. And so when times are not as tough, banks get aggressive, just like businesses get aggressive potentially with advertising or you know, going for it kind of thing with you know, with their business and and and and taking on extra risk. Banks do the same thing. And different banks at different times do that. And what's very interesting about it is that there's certain banks in this area that I never do business with because if you ever go to default, they said, the castapo after you. There's other banks that don't do much at all, Dean, So you've got to kind of you should talk to a fractional CFO because they know what banks are, uh you know, are the ice cream banks in your market.

8:31 So you should really talk to a fractional CFO about it, because that's one of the things that we know now. I know about the New England area, and I have contacts around the country as well. Uh So if somebody called me and they had uh they were living in Tapeka, Kansas, I could probably help them and point them in the right direction in terms of you know, what banks to go after and what banks to not go after, not not pursue. So now that we're going to go talk about the media ochre in the heart, I would assume that it's a good assumption that the big banks, the like nationwide big banks are not going to be the ice cream banks.

9:14 Before well before two thousand and eight, you were wrong. Six two thousand and eight, the bank of a Bank of America took they used to give they used to give lines of credit out for us just forget about tax returns, forget about business profit. They used to give it based on over five seventy five credit score. You got one hundred grand. They got murdered. They got so murdered during the OA crisis they didn't even have to They didn't even pursue any of the personal guarantees. They just wrote off all of it and said forget it.

9:58 Wow. Yeah uh. And and I had two or three centul client new clients that came to me because they were in trouble with the bank. Well they weren't in trouble with as it turned out, but that they had gone in default with the Bank of America during the crisis, and Bank of America just said, we wrote it off. Don't worry about it. We wrote off. So but since then those banks have tightened up to your point, and more of the uh, I'm not going to say local banks, but banks that are intermediate size, say a couple a billion of three billion in assets. Those banks, uh, some of those banks, some of those banks have have real easy requirements to get a line of credit.

10:47 HM. So you have to shop around and then you have to talk to somebody who kind of knows the banks. Yeah, because you don't want to go. There might be an ice cream bank, but they come after you with full force if you're go into the fall, so you might you might want to stay away from that. But so though the ice cream truck that gives you the ice cream, and then as you walk across the street, they run you over. There you go because you didn't pay for your ice cream, right, that's. Right, Yeah, that's exactly right. You didn't pay for it, So now we're going to run you over. And that's basically what happened. So I think the banking world you have to be careful, but by all means you need to have a line of credit for protection. It's just that it's all it is is defense. It's not offense, it's defense. And you know, one of the first things I did when I started my business at seven was get a line of credit. And I started with it like a ten thousand dollars line of credit, real small, uh, and then you know, built it up as my business growth.

11:54 But you know it's it's a it's a definite requirement. Well, and I think a lot of people don't realize too. I'm glad you said what you did before about what you shouldn't do. It's not a bank account like lots of the people think a line of credit is a bank account. Like, No, it just sits there. Pretend like you don't have it unless it's an emergency, kind of like your retirement plan in personal life. Can you have access to your retirement plan? You sure can, but you're going to count that money as gone unless something devastating happens and you absolutely need to access it. The best time you use the line of credit is when your cash and receivables added together cover your payables and whatever you take out of the line of credit, because that will hop that liquidity eventually, the receivables will eventually become liquid and you can pay down the line of credit. So it's not that's the best way to use it because sometimes because even though your cash and receivables are higher than your payables credit line, you can't make payroll this week, you know, because the receivables are just have too high. It's just a cyclical thing. It's not like you're mismanaging your receivables. It's just a cyclical thing.

13:12 So many many times, and by the way, lots of times in those situations, your credit line is outstanding for a week or two. That's it, right, But it saved you make. You from go to a credit card paying eighteen percent or some twenty five whatever crazy percent you're paying. You know, we saved you from borrowing it from Maine. Uh. You know, it's just you know and having uh you know, that embarrassment with family or or telling the wife you have to go into hip Hocket National Bank, you know, to take the money up and put in the business. That's never a spouse. That's never a good conversation. No, they don't want to do that. No, got to do that. So anyway, that that's it.

13:57 And you know the way the way you can reach me by going to NEXTSTEPCFO dot net and go to the contact page on my website. Fill out the contact form, and if you have a question about line of credits, you can put the words line of credit in the message section. Be happy to answer. Your questions and go out there and get yourself an ice cream truck. Thanks once again, Michael for some great advice and I look forward to a lot more from you in our powerful business Strategy segment of the Positively pipemin and next week we're going to talk about something that goes hand in hand with that line of credit, solving cash flow problems. So stay tuned, come back to here the Adventures of pipemin W four cy Radio.

14:51 Thank you for listening to the Adventures of Pipemin im W for CUI Radio.