Most lines of credit mature five months after fiscal year end. For 12/31 companies that means the end of this month. Before your banker calls and schedules a closing for the renewal, there are 4 things you should know:
1) Did I comply with all the terms and conditions?
- Was the line used for the purpose intended? If your commitment letter says short-term working capital, they mean it. It can’t be used to finance owner’s distributions, fixed asset purchases or to purchase another company.
- Most lines have a 30-day payout requirement, did you meet it? While the line can be used 335 days of the year, it has to be at 0 for at least 30 consecutive days to comply.
- Am I in compliance with any covenants like cash flow coverage or debt to worth ratio?
2) Does the line still fit your needs?
- If your sales are going up, the line should take care of the timing difference between payment of expenses and revenue comingin. If your company is growing 10-20% that means you may need an increase. The rule of thumb is one month’s revenue.
- If you have a borrowing base against receivables and inventory, you may need to tweak the calculation, especially if you finance inventory with your line. Many banks will impose caps, which limit borrowing against inventory. You may need to either remove the cap or increase it.
3) Is your interest rate and fee competitive?
- Notice I didn’t say cheapest. Changing banks over a quarter percent may not be worth it when you consider the disruption of your business with the change.
- It doesn’t hurt to shop your line of credit occasionally to be sure your rate and fees are competitive.
4) Has your bank been acquired within the past year?
- If so, it’s possible the new bank has a different approach to underwriting lines of credit.
- If that’s the case, you may want to start your renewal process early. If there’s a new credit approver, it helps to invite them out to your office, if they’re local. Get a feel for their style and their underwriting process, find out if they like your industry.
- Not all banks are alike, and you don’t want to get a surprise that they’re not renewing your line for circumstances you didn’t anticipate.