"I have numerous clients who don't use their line of credit once they're established," says Feeley & Driscoll partner Jacqueline Weir. "But it's a great tool to have in case you do need it."
Credit: Tracy Powell
In a down economy, a line of credit can prove to be a lifesaver for architecture firms. And we don’t use that word lightly. Just ask Cubellis, which had to shutter all 12 offices last year after its credit line was spiked. If you’re considering a line of credit, or have been fortunate enough to secure one in these tight-fisted times (praise Bernanke!), Jacqueline Weir has some advice for you. The partner at the Boston-based accounting/business consulting firm Feeley & Driscoll has specialized in architecture and engineering practices for the past decade. “I’ve always been fascinated with architecture,” she says, noting that Feeley & Driscoll had a large construction practice before she expanded the firm’s services into these related professions.
When should a firm get a line of credit?
Secure your line of credit well in advance of when you need it. Get it so you have it and it’s not an emergency.
Should firms work with their accountants to secure a line of credit?
It adds credibility if you work with your CPA. They can give you options, let you know what banks look for, what they expect, and steer you towards a good fit.
How large a line of credit should a firm have?
Three months of working capital.
Should the partners’ credit cards ever be considered as part of their line of credit?
The bank wants to know that you have money at risk. A credit card could be an expensive way to bootstrap or start your business. I don’t think that option should be off the table, but there are better options than your personal credit card.
What should firms use a line of credit for?
You have to meet payroll first. Often, you don’t get paid by your clients for 30, 60, 90 days—and, unfortunately, sometimes even longer. That’s a lot of up-front money.
What should firms not use a line of credit for?
It’s a revolving amount of money to be used for short-term financing needs. I don’t view it—nor will your bank—as permanent capital. For instance, if you’re going to purchase a $100,000 accounting software system, I wouldn’t put that on your line of credit. You’re going to realize the benefit over multiple years, so try to obtain a long-term lease or financing for it. You want to match your financing over the life of the equipment.
In today’s economic climate, many firms are trying to make it to that next big project without laying off people. Can a line of credit help here?
You don’t want to fund recurring losses with your line of credit, unless you know it’s temporary and you’ll become profitable enough to repay those. More often than not, the principals of a firm personally guarantee a line of credit. If things are tight, and you’re not going to be able to absorb some losses—well, people have to make tougher decisions now than they ever have.
When do you tell the bank you’re looking at problems?
There are two schools of thought. One is to not tell the bank anything because you’re afraid of what they may do. I feel the more you communicate with your bank, the more they trust you. Keep them in the loop. Send them quarterly, or even monthly, numbers, so they can’t say they’re surprised.
Are there any tricks or hints for gaining and using a line of credit in today’s fiscal environment?
Try to come up with some money on your own. Then go to a bank. Be clear about what you need, with a dollar amount. The bank’s not going to provide you the answers. They’ll help you, but they want to know that you understand how to run the business before they’ll be your partner in the business.