Credit is tight. Loans are hard to come by. Lending guidelines are getting more conservative. These are the consequences of our current economic crisis. Unless you've been living in a cave isolated from society for the past year, you know these facts to be true. You have probably also heard the terms "Green Shoots" and "Economic Recovery" being flung about by economic pundits over the past 6 months or so. These are the same pundits who in 2007 were saying that it was impossible for the United States to go into recession given the strength of our financial markets. In other words, don't believe everything you hear. Credit may remain tight for some time. Everyone has an opinion as to when/if credit will loosen up, but nobody has a crystal ball guaranteeing a timeline as to when it will happen. In the meantime, we should all heed these wise words:
- Hope for the best
- Prepare for the worst
- Expect the unexpected
Most small businesses depend on credit in order to survive at some point during their fiscal year. In an environment of capped credit lines and tight money, small business owners should take advantage of alternative methods of financing. If you have an existing credit line tied to the current prime rate (which is now at an all-time low), you should use it sparingly. Lenders are extremely skittish right now and an increase in your outstanding balance may spook them into capping your line. This has happened to many small business owners in the past year.
You should leave this credit line open for emergencies. Should something extraordinary come up you can take this line down in one big chunk. If you max out your line in one shot, at least you will have a large sum of cash at your disposal before you get capped. In the meantime, you should leave your line open and use alternative forms of financing to fund your operations.
There are several programs still available to the small business owner. You can use equipment leasing to finance your asset acquisitions instead of using cash. You can use a working capital loan program secured by your business' cash flow (bank and merchant accounts). You can finance your account receivables.
Be warned, all of these options will be more expensive than using that line of credit you have established with your bank. There is no doubt about it. The average business owner will have a hard time signing off on a more expensive form of financing when he still has that line of credit with that beautiful interest rate attached to it. For some people, paying the lowest interest rate possible is a matter of pride. Pride happens to be one of the seven deadly sins for a reason. It clouds rational judgment. Once a business owner maxes out that gorgeous credit line, it will be nearly impossible for him to secure financing elsewhere. He will be capped and it will be too late. Alternative lenders will be spooked by the fact that he had to max out his credit line and will view the exposure as a sign of impending bankruptcy.
Keeping a clear head and keeping your pride in check will help you survive anything so long as you heed these words...
Keep your options open
- Keep your lines of credit open
- Diversify your debt
Eric Johnson
Account Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com
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