Your Operating Line of Credit Should be "Just Right"

BY: Stanley D. Koopmans

When it comes to your company’s operating line of credit (LOC), Goldilocks had the right idea.

Rather than trying to get approved for the largest possible LOC your business may qualify for, it’s much better to evaluate your expectations for the year, and attempt to match your credit line as closely as possible to your anticipated needs. This approach also helps cover the scenario where your current LOC won’t be adequate to support projected growth.

Not too big. Not too small. It’s time to make sure your current LOC is a perfect fit.

Find Your Fit

April and May are popular months to perform a review and adjustment of your operating LOC: Your year-end financials have been submitted, and your tax preparation provided a year-in-review assessment of whether your company met expectations for the prior year.

So what does the year ahead have in store? And what do you need from your operating LOC to support those anticipated goals?

Have a conversation with your business lender at State Bank of Cross Plains to get a “professional fitting.” We can help you customize an LOC to match your needs. Some of the questions we’ll help answer include: 

What is the purpose of your LOC? How are you using it? The way you use your LOC will dictate how much you need and how often you need it. For example, did you establish your LOC to balance sporadic income from a seasonal business? If so, there should be periods of time (at least 30 days each year) when your LOC is paid off, and other times when it is nearly maxed out. On the contrary, if your LOC was established to support a year of rapid growth, then it was likely at or near its limit most months.
Did your LOC meet your needs last year? Before looking ahead, let’s evaluate what’s worked and what hasn’t worked in past. Were there certain times of the year, or certain circumstances that arose, when the credit limit wasn’t adequate? We can talk about ways to solve any issues that might be recurring.
Will anything change in the coming year? If your projections for the upcoming year look similar to past years, then our goal will be to fine-tune by learning from and adjusting for any issues you’ve encountered. If you anticipate significant growth, or perhaps plan to sell off a part of the company, then it’s important to reflect those changes in your LOC, as well. For instance, do you have any big contracts coming up that might require an investment in additional equipment or personnel? Will there be a change in leadership or ownership?
What are the possibilities that aren’t currently set in stone? Is a big project coming up for bid in the next few months? Are you considering a merger? Are you developing a new product or service or expanding into a new market? There are multiple ways to prepare for projects that may require quick cash – or may not happen at all. We can raise your current LOC limit; we can preapprove your business for a separate LOC, so there’s no delay if and when the time comes; or we can recommend a different loan product you might be unfamiliar with that would make more sense for your specific endeavor.
A frank and open conversation with your banking partner can often uncover cost efficiencies and innovative solutions for more financial stability. 

Schedule a Meeting

Call your local State Bank of Cross Plains office to request a meeting with a business lender for a review of your operating LOC. To get the most out of your conversation, bring the following information with you to the meeting:

Year-end financials, including accounts receivable and accounts payable
Tax return
Projections (if you have them)
Personal financial statements for the business owner
An LOC that supports your business needs without jeopardizing opportunities can serve as a lifeline for growth and stability. Take steps to make sure your LOC is the perfect fit.

For more information about Commercial and Industrial LOC programs, contact our Loan Production Office at (608) 826-3519.

Topics: Business Banking, Commercial Banking, Community Banking, Business Operations, Business Plan

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