Opinion: Play financial offense, defense with revolving lines of credit

Micah Scott

Entrepreneurs are great at seeing opportunities. That said, one of my missions as a lender is to help those same entrepreneurs and business owners play financial offense and defense. Preparing for potential risks can help bridge the gaps between one opportunity and the next.

Banks do this. We plan ahead for potential changes in liquidity caused by fluctuations in interest rates, costs, borrowing practices and the economy. Our preparations include proactively establishing lines of credit that help us ensure stability and service for our customers. I’m a big believer in business owners doing the same thing: establishing their own lines of credit for contingencies in advance of needing money.

Lines of credit are revolving, meaning a borrower can draw on them, pay them back and draw on them again in the amount they need when they need it. They’re a bit like having a credit card set aside for emergencies or large, planned purchases, and setting one up is a lot like setting up any commercial loan. Outside of typical fees required for any loan, borrowers who set up a line of credit only pay interest on the amount of money they actually borrow.

Funds pulled from a line of credit can generally be used at the borrower’s discretion for anything from wiring money to purchasing equipment to making payroll. (Some lenders do restrict how loan proceeds can be used, so make sure to talk with them ahead of time to avoid surprises.) Typically, lines of credit are used for temporary needs. Some borrowers use them infrequently when larger expenses come up; others use them like a credit card for everyday expenses.

Lines of credit often help borrowers save on interest costs because they’re tied to loan rates, making them a less expensive option than carrying a large balance on a high-interest credit card. Established ahead of time, they can help borrowers access funds at a moment’s notice for time-sensitive investment opportunities or real estate acquisitions that require a quick close. I’ve also seen customers with a large receivable coming in on a 30-, 60-, or 90-day pay schedule use their line of credit to make sure their own expenses and employees are paid on time.

Beyond that, it’s always possible that a circumstance outside of your control, like an economic downturn or losing a high-volume customer, can cause things to “hit the fan” for your business. When that happens, having an existing line of credit that helps you cover expenses and minimize complications right away can be a lifeline. It isn’t a perfect substitute for cash (some lenders have the ability to reduce or restrict access to credit lines in particularly challenging economic times), and it’s better used to complement the cash on a company’s or investor’s balance sheet and add liquidity when needed. That said, it can still provide peace of mind and a financial safety net.

Something people might not know is that commercial loans are almost fully customizable – there’s no preestablished set of criteria required for approval. That flexibility extends to lines of credit. When a customer comes to a bank and says, “Here’s what I have and here’s what I’m looking to do,” a great lender can work to find a way to fit a loan or line of credit to their cash flow, credit and goals.

To find out which banks offer custom lending solutions and learn who’s good at what they do, consider asking someone who has already been through the loan process for a referral. Customers looking to explore their loan options will benefit from a knowledgeable lender who will help them think through their needs, cash flow, expenses and growth projections; be able to talk through their business’ cash conversion cycle; and help them fund any gaps that exist.

In my experience, now is always the time to make plans and preparations for future stability and success – especially when a business is doing well. Carve out time to speak with a lender you trust, tap into their expertise and help your business thrive.

Micah Scott is senior executive vice president and chief lending officer at OakStar Bank. He can be reached at mscott@oakstarbank.com.