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Three mistakes credit line users
make
By Jenny C. McCune •
Bankrate.com
 There
are three common mistakes experts say that small businesses make
when attempting to use credit lines:
- Mistake 1: Bad application
First, they don't adequately prepare their applications. "Often,
people don't approach this in a disciplined fashion," says Don
Dailey, partner in charge of middle market advisory services for
the Midwest region of PriceWaterhouseCoopers
in Cleveland. "Frankly, they need to put together an application
that will impress the banker."
- Mistake 2: Using for long-term
needs
Second, they misgauge the use of a credit line. "It's a misallocation
of funds if a company uses a credit line for a long-term purchase,"
Dailey says. In addition, much like a consumer, a company can
get overextended by using a credit line to "live beyond its means."
- Mistake 3: Not planning
for repayment
Third, they think that using a credit line means never having
to pay it all back. Like commercial loans, credit lines can be
"called" at any time by the credit line provider.
Most credit line agreements also include a cleanup provision,
which means that the user must pay off the entire credit line
by the end of the agreement, even though the credit line may be
extended to the following year. In addition, small businesses
need to be aware of changing economic conditions. They should
ask themselves: If my industry or the economy at large took a
downturn, would I still have the resources to pay off my credit
line even if business slowed?
Just being aware of these pitfalls can help a company avoid them
or at least avoid the worst.
Jenny C. McCune is a contributing
editor based in Montana
To comment on this story, please e-mail the
Bankrate.com
editors
-- Posted: April 13, 2000
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