Lines of Credit Offer Flexible Financing
Making it possible to keep up with demand
Debbie Bontemps, the owner of All Seasons Argo and Equipment, and Chad Steadman, a vice president with First National Bank Alaska.
© Chris Arend Photography
By Tracy Barbour
As a full-service retail dealer of amphibious all-terrain vehicles, All Seasons Argo and Equipment sells what some people consider to be the Cadillac of ATVs. Argos, as the six-passenger rigs are called, can carry about 1,200 pounds and tow 1,800 pounds. They can travel across almost anything—dry land, water, swamps, and thick mud. This makes them a vehicle of choice for many hunters, anglers, and outdoor enthusiasts.
Anchorage-based All Seasons Argo and Equipment is used to the vehicles being a hot item during the spring/summer season. But this year was different. Early shoppers and sales promotions accelerated the company’s inventory flow way beyond normal. “My vehicles were going out the door faster than I could get them here,” says owner Debbie Bontems. “I pushed my June order up three times and ended up shipping it May 30.”
Thanks to a $250,000 “flooring” credit line from First National Bank Alaska, Bontems was able to keep up with the demand. She accessed funds from the line to increase orders, and maintained adequate cash flow until the rigs could be shipped in from Canada—a four-week process—and sold.
While the flooring line came in handy for ramping up orders this year, Bontems initially opened the line in 2005 to reduce shipping costs by ordering Argos in larger quantities. Shipping just one of the five-foot-by-ten-foot vehicles runs about $1,700, compared to $1,200 each for twelve of them. Now the company orders twelve Argos at a time instead of eight, which translates into lower costs for customers. “Thanks to financing, we retail our Argo products at the same MSRP as any dealer in the Lower 48, who pays less than half in freight cost compared to us here,” Bontems explains.
Bontems maintains the credit line from year-to-year, regardless of whether or not she uses it. She appreciates having access to the backup capital and a positive relationship with the bank. “We have been very appreciative of First National’s personable approach to a professional relationship; it’s a rare trait these days,” she says. “It is also noteworthy that they have willingly negotiated terms to be more accommodating. In short, they listen and value customer loyalty.”
All Seasons Argo is among a significant number of businesses that are using a line of credit to maintain and grow operations. Credit lines are a common and convenient alternative to term loans, which differ significantly. With a term loan, all of the funds are dispersed up front, the interest rate is normally fixed, and the borrower makes a set number of monthly principle and interest payments. With a credit line, the borrower has immediate access to cash among a number of other advantages, according to Chad Steadman, a vice president with First National Bank Alaska.
“A line of credit allows you to get money advanced as you need it. You make interest-only payments on the principle. It’s revolving,” Steadman explains.
Revolving credit gives businesses the flexibility to pay a fee to access a certain amount of cash and reborrow the funds once they have been repaid. It’s like renting money.
Credit lines are often used to fund short-term working capital needs from making payroll to ordering supplies. “It can help with short-term purchases if borrowers don’t have the capital or cash flow on hand,” Steadman says. “It can also help while borrowers are waiting for customers to pay them.”
That was exactly the situation with Hawk Consultants, which provides contract engineers and other professionals primarily to oil companies. The Anchorage firm opened a KeyBank credit line for approximately $500,000 in 1990 to carry payroll while it waited for clients to submit payments. Its contractors had to be paid bi-weekly, while the company had to wait for months to receive checks from some of its customers. Having the credit line was critical back then, according to Managing Member Maynard Tapp. Without it, the company could have failed to survive and grow. “The relationship that we’ve established with KeyBank has allowed us to grow as fast as we possibly can,” Tapp says.
The credit line has steadily risen over the past twenty-plus years, but now Hawk Consultants has ample cash flow and no longer needs to use it. Regardless, he values his company’s working relationship with KeyBank, saying: “The fact that we’ve stayed with them all these years speaks for itself.”
Traditional lines of credit are typically secured by “soft” collateral like accounts receivable and inventory. With lines that are backed by accounts receivable, the amount of the financing is determined by the value of the accounts receivable, accounts payable, and other factors. “We’ll look at the accounts receivable to make sure it’s good quality,” Steadman says. “We’ll analyze who your customers are. We may believe in the borrower’s ability to repay, but it also comes down to their customers’ ability to pay them.”
The age of the accounts receivable and inventory is also a major area of consideration. At Wells Fargo bank, for example, financing generally isn’t offered for accounts receivables more than ninety days old. “The more stale the accounts receivable and inventory the less likely it will turn into cash,” says Wells Fargo’s Anchorage Business Banking Manager Bond Stewart.
Financial institutions finance accounts receivables and inventory at different percentages. Northrim Bank, for instance, offers financing on a significantly higher portion of earned and billed accounts receivables than on inventory. “We might only finance 50 percent of your inventory turn, but 75 to 80 percent of your accounts receivable turn,” says Commercial Loan Unit Manager and Bank Economist Mark Edwards. “It can be more if you’re well established and have a history of turning inventory over.”
On an accounts receivable line, Northrim also analyzes the borrower’s collection history, bad debt write-offs, industry, and concentration of customers. Is there just one big customer needing to pay or multiple customers? “All of those things can affect how aggressive we can be on the percentage of the amount you can borrow,” Edwards says.
Qualifying for a line of credit also is affected by the Five Cs of credit: conditions, capacity, character, collateral, and capital. These are the same factors that apply to any financing situation, according to KeyBank President Brian Nerland.
Businesses without an established track record in these areas could consider the Small Business Administration’s CAPLines program. The guaranteed line of credit ties repayment to the business’s cash cycle, rather than an arbitrary time schedule. “It’s a great resource for companies that are looking to expand,” Nerland says.
Under CAPLines, borrowers need adequately secured accounts receivable and/or inventory in to qualify. The program offers a variety of lines of credit, including a revolving line of credit, a fixed line of credit, a seasonal line of credit, and a longer-term straight line of credit with a one to five-year maturity.
Stewart points out that while it can be more difficult for newly established business to qualify for a line of credit, it doesn’t automatically preclude them from getting a credit line. That is, if the fundamentals are in place.
Credit lines vary in amount, ranging from thousands to hundreds of thousands of dollars. In general, there is no set limit for credit lines. The extent of the line weighs heavily on the strength of the company, its financials, and the collateral involved, according to Stewart.
Some financial institutions offer credit lines that are outside the traditional cash advance model. KeyBank’s Business Cash Reserve credit line, for instance, transfers funds directly into a business checking account. With a limit of $10,000, the line is designed to provide overdraft protection against unexpected cash flow shortages. “It’s very popular for small businesses,” Nerland says.
Words of Advice
Most banks renew credit lines annually, and adjust the amount, according to the economic condition of the business. “We typically like to have the lines renew, so that we look them over every year to make sure nothing adverse has happened to the business,” Stewart says.
Stewart also prefers to see credit lines rest. He explains, “This shows that you can manage your finances by collecting your receivables and paying down the line.”
Nerland has similar feelings. He says companies can get into difficulty if they employ a short-term line of credit for a long-term use. Therefore, they should be paying down their line, instead of always advancing it, he says. “Generally, the bank likes to see the line of credit revolve because it shows the business has the ability to repay it,” he adds.
Steadman of First National also cautions companies to not let their line go stale. Translation: Don’t run it up to the maximum and leave it there. “It should fluctuate with your accounts receivable,” he explains.
He also advises businesses not to wait until they need a line of credit. “If you’re actively managing your business, you should have a line,” he says.
You should also hire a professional to handle your accounting and bookkeeping, says Edwards of Northrim Bank. A good certified public accountant can offer valuable advice that can help businesses better understand their profit margins, save money by not using credit cards, and better position themselves to secure a credit line. “We do lines of credit for people who don’t work with CPAs, but it is much easier to qualify if you have good historical financial recordkeeping,” Edwards says.
Former Alaskan Tracy Barbour writes from Tennessee.
Copyright © 2013 Alaska Business Monthly. All rights reserved.
Posted: August 1, 2013