Net Working Capital is determined by Subtracting CURRENT LIABILITIES from CURRENT ASSETS<\/h2>\n
Current assets are defined as:<\/em><\/p>\n Current liabilities are defined as: <\/em><\/p>\n Are there times during the year that your sales slow down?\u00a0 This is known as seasonality.\u00a0 Access to working capital during these times to help maintain operations can be critical.\u00a0 When business ramps up, the timing difference between generating an invoice, collecting on those invoices and paying vendors, employees and the \u201ctax man\u201d can create short term cash needs.\u00a0 Have you ever been afforded the opportunity by a vendor to make a special purchase at a discount which will help you improve your margins?\u00a0 These are some examples of when working capital is critical for a business.<\/p>\n Some businesses are strong and efficient, and receivables and inventory are turned into cash quickly on a sustained basis and can comfortably get through the issues outlined above.\u00a0 However, this doesn\u2019t mean you shouldn\u2019t have a line of credit<\/em> in place as a safety net.\u00a0 If your business experiences stress (diminished liquidity) during these circumstances, you should consider obtaining and utilizing a line of credit.<\/p>\n The limitations here are the size of line (the limit) and the cost (interest rate).\u00a0 Because this is an unsecured means of borrowing, the costs are typically much higher than conventional secured borrowing.\u00a0 In order to have access to the availability in the future, you will have to quickly reduce or pay off the balance.<\/li>\n A business will have to pledge assets to a financial institution as collateral.\u00a0 This type of borrowing is more cost effective for businesses due to the request being secured by collateral. \u00a0As a result, the interest rate is generally more favorable.<\/p>\n Financial institutions determine a business\u2019 capacity to borrow money by analyzing historical performance and collecting the following information:<\/p>\n The personal information is collected from those individuals with at least a 20% share of the business and in most cases, these owners will be required to provide personal guarantees. The financial wherewithal of the guarantors will be analyzed as well. Quality financial reporting will help move the process along.<\/p>\n Depending on the size of the line of credit, financial institutions may require a periodic Borrowing Base Certificate to be submitted for review.\u00a0 This will help to determine a business\u2019 ability to access credit through an analysis of its receivables and inventory position.\u00a0 Receivables that are 90 days or older are generally excluded from the borrowing base as they are deemed at risk for collection. This analysis will help keep a business \u201cin formula\u201d, which means that the line used at any given time stays within the prescribed advance limits against receivables and inventory. \u00a0Because lines of credit are considered a short-term credit facility, they are secured by assets that are easily converted to cash (receivables and inventory) \u2013 hence the borrowing base analysis.<\/p>\n Lines of credit for working capital purposes are not meant to be used to purchase equipment. This defeats the purpose of meeting the short-term liquidity needs of a business. A good banker will see this and determine how much of the line was used for capital expenditures (CAPEX) and carve that amount out and amortize to the capacity of the cash flow.\u00a0 Ideally, if your business is capital equipment intensive, a separate equipment line or guidance line should be in place. Invoices are submitted and the line is accessed based on the expected advance rates and generally a separate amortizing loan is created shortly thereafter.<\/p>\n In some cases, businesses use their own cash to make an equipment purchase without applying this excess cash towards the working capital line balance, which causes the line to remain static and not revolve and once again, defeats the intent of meeting the short-term liquidity needs of a business. Your banker should determine the unfunded CAPEX (not borrowed) and carve out the line and amortize accordingly.\u00a0 Ideally, this line of credit should \u201crevolve.\u201d<\/p>\n Working capital credit facilities are a temporary means to inject capital into your business.\u00a0 As you collect on your receivables, you should make every effort to reduce your outstanding line balance, replenishing your availability to allow you to borrow again.\u00a0 Some institutions may require a \u201crest period\u201d or \u201cclean-up\u201d provision to encourage proper line usage to help avoid using the line as a permanent injection of capital into the business.<\/p>\n Use your line of credit in the spirit it was intended \u2013 to provide short term access to working capital and revolve the balance periodically through the year.\u00a0 Communicate regularly with your banker to help understand your cash flow cycle<\/a> and your CAPEX needs.<\/p>\n Dennis Platipodis has been in the banking industry for over 35 years providing customized banking solutions to closely-held businesses and real estate investors, both owner-occupied and non-owner occupied. He enjoys helping people meet their objectives and sharing in the vision they have for their businesses.\u00a0 He works tirelessly to become a trusted advisor to business owners in Chicagoland.<\/p>\n Hometown National Bank\u2019s roots go back to the 1880s and evolved into strong, independent community bank with branches in LaSalle, Peru and Joliet.\u00a0 Throughout the years, Hometown has remained dedicated to serving the communities in which it does business and is committed to providing unsurpassed banking services that fit business\u2019s ever-changing needs and prides itself on being a true, locally-owned community bank.\u00a0 Hometown provides common-sense solutions in what has become a complex world.<\/p>\n","protected":false},"excerpt":{"rendered":" Businesses\u2019 life blood for sustained operations and current growth objectives is working capital.\u00a0 Working capital helps a business pay its employees and its vendors.\u00a0 In short, it is the cash that you have immediate access to that allows you to open the doors daily for business. Businesses should be determining on a regular basis the […]<\/p>\n","protected":false},"author":2,"featured_media":19780,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[34,35,39,49,57],"tags":[1752,1755,1753,1754],"acf":[],"yoast_head":"\n\n
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BUSINESS CYCLES<\/h2>\n
WHY HAVE A LINE OF CREDIT?<\/h2>\n
TWO TYPES OF LINES OF CREDIT TO CONSIDER<\/h3>\n
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UNSECURED CREDIT CARD<\/strong><\/h3>\n
SECURED LINE OF CREDIT <\/strong><\/h3>\n<\/li>\n<\/ol>\n
HOW DO YOU QUALIFY FOR A CONVENTIONAL LINE OF CREDIT?<\/h2>\n
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BORROWER EXPECTATIONS?<\/h2>\n
PITFALLS?<\/h2>\n
\nDennis Platipodis<\/a><\/h5>\n
Vice President –\u00a0 Commerical Lender of Hometown National Bank<\/a><\/h6>\n
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