Not all line of credits are created equal.  Different banks include different things in the line of credit.  It can make a big difference in what you qualify for in any given month.  It can mean the difference between being able to borrow all you want versus having to tap into other company funds (or if you don’t have additional funds, whether you can take on a customer order or take a pass on it).

 

Normally lines of credit will be based on both accounts receivable and inventory, although sometimes inventory may not be part of the line of credit that the bank is offering.  Here are some things to check on in each of these areas:

 

Receivables

·         How old will receivables be before they are excluded?  This could range from 60 to 120 days.

·         Are there any types of accounts that will be excluded based on their credit history?

·         Are receivables under a certain dollar amount excluded?

·         Are certain classes of receivables not included, such as certain services or products?

·         Will there be any geographic restrictions, such as foreign sales?

 

Inventory

 

·         Will finished products only be covered or will work in progress be considered too?

·         What about product that is coming in from overseas sources?

·         How will they treat product out at subcontractors and not in your facilities?

·         How will they treat older merchandise?

 

There could be other questions based on your industry and production or service process.

 

This can make a big difference.  I know of one company that was shifting to outsourcing some products from overseas.  They had to pay for the merchandise at the time it left the foreign plant, but the bank would not count it towards the inventory line until it arrived in their warehouse in the states.  That put a serious crimp in their ability to expand that line of business.

 

Know the fine print in this area of your line of credit.  Don’t take it for granted either that these are non- negotiable.  You might have some room to get these adjusted.

 

Bring more of what is out of your line into your line and save your cash for other uses.