Frederick J. Sitzberger
Yes, as crazy as it might sound – especially now – your banker is your best friend, and understanding their tools helps us become more successful business people. The line-of-credit is a short term credit facility. It should be paid off at least for thirty days each year.
From my understanding the line-of-credit was originally developed for the farmer. The farmer needed funds to buy gas for his tractor and pay for seeds and fertilizer. This was a loan in the spring. With good weather, favorable rain and good commodity prices, this loan would be repaid in the fall, after the harvest.
Sometimes we fall into a situation where we use the line-of-credit as permanent capital. The line is never paid off and it may continually increase from year to year. This is a misuse of the line-of-credit tool. If this is happening consider setting up a term loan and amortize this loan over three to five years.
“Terming” the line-of credit allows the company to slowly convert this to permanent capital. The immediate cash monthly payment of interest and principal have the effect of creating a future savings account. Your borrowing capacity will increase as your debt is paid down. This helps during equipment purchases, negative cash flows, and acquisitions.
I have finally understood Ben Franklin’s sage advice; “a penny saved is a penny earned.” Save your business through proper use of the line-of credit and your banker will always greet you with a smile.