At some point in the growth of a small business, you most likely received a letter from your bank, or maybe a local credit union that offered a $50,000 credit line for your business. That is usually the smallest amount offered. As time went on you probably received progressively larger credit line offers. Using corporate credit cards for travel and other occasional expenses is mostly a matter of convenience and organization. The points don’t hurt of course! However, credit lines are meant to be used in much more significant amounts and often business owners don’t know when to best utilize them and for what types of expenditures.

As a general rule credit cards should be used for expenses that you plan on paying each month fully. Business loans should be used for acquiring long-term assets where the utility of the asset is measured in years. Lines of credit are best utilized for short-term expenses of 60-180 days. An example of proper use of a credit line is to purchase inventory which will be entirely sold within 90-120 days. Inventory should usually not be purchased on a credit card because of their higher interest rates compared to other loans. Non-credit line loans, while providing the best rates, will generally require collateral above and beyond company receivables, so using that to finance inventory is often not practical.

Another good use of a credit line might be to finance equipment that cannot be self-financed out of cash flow but does not require multi-year loans. Having a credit line allows a company to make a discretionary spending decision, but it’s essential that the credit line will be used only for expenses that will increase sales or will enable the company to grow within a reasonably short period. Using a credit line for expenditures like marketing or paying employee salaries is usually a reliable indicator of significant financial problems within the company which will only further be compounded by the use of said credit line.

It’s important to remember that a credit line is not a lifeline to keep your company afloat when things are going poorly. While it’s tempting to do just that, and unfortunately many companies including several past clients have used a credit line as a lifeline, it never ends well. The only sure way of fixing financial problems in business is to be able to reduce expenses while optimizing the efficiency of money spent on generating sales until the sales pick back up. Many companies have gone from multi-million dollar operations to an ungraceful exit by relying too much on credit or loans to sustain them rather than keeping operating costs under control as they grow.

A credit line appropriately used will allow a company to enhance its ability to grow, while a credit line used poorly will add to the instability of a company and may ultimately be responsible for the final nail in the coffin of that company. A strong CFO is vital to ensuring that the temptation to use a credit line is not used for the wrong reasons. A good COO will make sure that activities that incur expenses do not require the company to dip into a credit line unless there is an extremely high likelihood of company growth within a short timeframe as a result of the use of credit.

 

Excerpted From The Original

Beyond Sales: 50 Business Problems Every CEO Needs to Solve

Foreword by Roy H. Williams

Gene isn’t a journalist, but he is most definitely an investigator.
I was talking to a friend who employs about 250 people in 3 different companies when he mentioned that he had hired a specialist to figure out what was wrong with a company that was underperforming.
“Who did you hire?”
“A fellow named Gene Naftulyev.”
“He’s going to figure out what’s holding you back?”
“Yeah. He’s famous for it.”
“How famous?”
“Procter & Gamble. American Express. Kraft Foods. Target. They’re all clients of Gene’s.”
“What does he do, exactly?”
“He improves profits without spending money.”
“But how?”
“Process re-engineering, operational optimization, making business units autonomous, negotiating employee and consultant contracts and a hundred other things like that. It just depends on what you need. He refines the core of your business so that you become more efficient, have fewer frustrations and make more money. Naftulyev can always spot the problems and his fixes are famously quick and easy.”

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