What about Using Credit?

Author: Larry Chester, President

Part of the I don’t know what I don’t know series

No business owner wants to borrow money. It strains your emotions, costs you interest, and eats up valuable staff time. Properly used, credit can be a boon, because it can propel your business to the next level. Or maybe it’s a safety net so you can sleep at night. What are some special things that you should know?

1. Credit costs money – Borrowing money costs more than just interest.
   1. Origination Fees – If you’re borrowing from the bank, they charge you to initiate the loan.
   2. Commitment Fees – They charge you for funds that you DON’T use. The bank needs to reserve money for your use. They charge you to have it available.
   3. Attorney’s fees – You pay for the bank’s attorney’s fees to draft the loan documents – be sure to cap those fees.
   4. Field Audit – The bank charges you for their annual field audit. They send someone to check the accuracy of your records, and verify some ratios, and you pay for it.
2. Increased Reporting – Monthly financial reports will be required, and there may be financial covenants as well. They will check your debt level, your collections, your profitability. You have to meet the standards they set.
3. Personal Guarantee – Banks no longer loan money on just your signature. This is a high stakes business. They want you to be risking something as well.
4. Where to borrow
   1. Family and Friends – could be the easiest source, but it comes with lots of emotion.
   2. Bank – Loans can be secured by real estate, or guaranteed by the government, as in an SBA loan.
   3. Mezzanine debt – Higher interest loans from private lenders.
   4. Factoring – Borrowing money based on your accounts receivable.
   5. Credit Cards
5. It takes time – Make sure that you have time to get the money. Don’t expect to walk into the bank this morning and walk out with money this afternoon. It can take 90 days or more to get your loan. So be sure you plan for your cash future.

Borrowing money should never be done lightly. Businesses use loans to cover temporary cash shortfalls, buy equipment, acquire companies, buy buildings or expand into new markets. Loans should never be used to regularly cover operating shortfalls. The most important thing to remember about borrowing money is that you will need to pay it back.