If you're thinking about opening a line of credit, think twice. Steve Halt, CPA and president of accounting firm Halt, Thrasher & Buzas, Alexandria, Va., warns that credit lines are potentially dangerous tools for those who lack business savvy. "This money should not be used as a solution to business mismanagement problems," Halt says. "It should be used as a bridge loan for short-term need with a definite plan for payback."
Fundamental business problems, like undercharging, poor job cost accounting, or overdue receivables, are not good reasons to tap into a credit line. "It's easy money -- like a credit card -- and can sometimes be used as a crutch," Halt says. "But once you take that loan, you have to generate enough profits to pay it off. And that's often not easy."
A credit line can work for some companies, provided that the money is used for a purpose supported by the company's business plan. "For example, some companies work with the government, which may not pay for 90 days," says Halt. "The owner knows the funds are as good as gold but needs some cash to pay business expenses until the money comes in. This is an excellent use of a credit line." Halt says a credit line can also provide cash for growth, but only when a company will generate the profits to pay off the loan within 12 months.
Remodelers' opinions are mixed. "I never want to use a credit line," says Craig Deimler, Deimler & Sons, Harrisburg, Pa. "We've saved our profits over the years so we can loan money back to the business if necessary, instead of borrowing from the bank. We know that we have to generate the profits to pay ourselves back, and believe me, the incentive to earn those profits is much stronger when it's your own money you're paying back."
Cary Butler, Butler Construction Services, Kelso, Wash., acknowledges the value of building up working capital but sees a credit line as a safety net. "Every financially sound business should get a credit line so if they need it, it's there," says Butler. "Businesses have rainy days just like people do, and a credit line can keep you in business." Butler also points out that having a credit line from the bank brings another benefit: "It helps nurture a relationship with your banker, and that can be invaluable." --Victoria Downing is president of Remodelers Advantage, Fulton, Md. (301) 490-5620, firstname.lastname@example.org.