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Line of Credit = Sleep Insurance in a Recession

Recessions are stressful and challenging for any business owner. Whether it’s your first recession or your second, third, or so on, it’s hard to know how to prepare for the worst and whether the plans you’ve made will help or hurt. Every business owner deserves to have a company with a strong financial future. 

In the Great Recession of 2009, I worked with a management consulting company that experienced a decline in revenue and, fortunately, had a line of credit which they used to finance the business through a period of lost revenue. The downturn for their company lasted several years and the line of credit gave them the cash they needed to keep them in business. When things improved, they still had to pay back the line of credit on mutually agreeable terms, which was no small task. But by the time they were in pay back mode, the business had improved dramatically and was generating good profits and cash flow. 

I say this to stress the importance of your company being bankable and having a banker that understands your business. Well before the recession hit, this client had a track record of profitable years and a balance sheet that had a good cash position and little debt. Their company was bankable. Before the owner ever knew he might need it, he took out a line of credit for $500,000 from his banker. (Don’t say this to your banker, but banks loan money to businesses that don’t need it…). This client had built a relationship with his banker, sharing financials, having regular meetings to where there was a level of trust established. People do business with people that they know and trust. So, imagine trying to borrow money in a recession when you really need it and having no relationship with a banker

If you sense a recession coming, don’t wait until it hits. Plan to get a line of credit from your banker ahead of time. Ensuring you’re prepared is a 3-step process:

  1. Make sure you’re bank-ready. That means you can provide financial statements that are both accurate and timely.   
  1. Put together a thorough, complete loan package. Typically, 3 years of historical financials, your most recent interim financials, and your personal financial statement (yes, you’ll be signing a personal guaranty). 
  1. Make a compelling bank presentation to your banker (and the credit officer, hopefully) focusing on the 5 Cs of credit. Showcase your character, the collateral you’re offering, your cash flow to pay the line back, your credit history, and the economic conditions in your industry.   

I had one client that called his line of credit “sleep insurance”. If a recession hits, you’ll sleep better know that you have a backstop to a loss of revenue, in addition to any personal capital you may have to contribute to your business too.   

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