A line of credit can be invaluable to a small or mid-sized firm, says Key Bank's Maria Coyne—just don't rely on it for capital expenses.
Derryl Strong A line of credit can be invaluable to a small or mid-sized firm, says Key Bank's Maria Coyne—just don't rely on it for capital expenses.

IF YOU'RE LUCKY, your firm's income exceeds its expenses. Still, you could be waiting for a large check from a client at the same time that your employees and consultants expect to be paid. Even businesses that operate in the black sometimes have cash-flow problems. And many architects make matters worse by paying insufficient attention to finances: The same practitioners who will work all night perfecting a design detail tend to ignore their bank statements.

Luckily, there's a relatively simple solution for smoothing out cash-flow fluctuations—a line of credit, which Maria Coyne says is a must for any small or medium-sized firm.

An executive vice president of Cleveland -based Key Bank, Coyne is an expert on the financing of small businesses, including architecture firms. She is also the national spokesperson for Key4Women, a program for female entrepreneurs, and she blogs about small businesses at www.key.com. Before joining Key, she was a small-business strategist with the Greater Cleveland Growth Association and an executive with Bank One in Chicago.

First, keep money coming in ... Architects, Coyne says, need to pick clients who will pay on time, although she admits that's easier said than done. What you can do is give your clients less leeway in paying you than your vendors give you—say, 30 days (for clients) as opposed to 60 (for vendors).

... while trying not to spend too much. Technology has made it possible for new firms to outsource many big-ticket items. For example, instead of buying expensive printing equipment, you can hire a firm that specializes in architectural graphics.

But when receipts don't match expenditures ... Coyne recommends a line of credit, which she describes as “like a credit card without the card.” Once you're approved, you can draw it down simply by transferring money to your firm's checking account. The interest rate will range from prime plus one to prime plus five, depending on your creditworthiness and other factors. Payments will be either all interest or interest plus a tiny bit of principal.

Apply for the line before you need it. If you're starting a new firm, you will have to show that you're creditworthy; the bank may ask to see signed contracts with clients. It also helps to have collateral, which can be personal property or accounts receivable (without collateral, you'll pay a higher rate of interest). And hope your personal credit rating is strong: Banks won't distinguish between you and your firm when it comes to creditworthiness.

Take advantage of SBA programs. The Small Business Administration has a number of programs that make it easier for you to obtain credit. Under a plan called SBA Express, the agency will guarantee 50 percent of your line (with no additional paperwork required). That kind of guarantee “helps the bank get comfortable with businesses that have no track record,” Coyne explains.

Use the line of credit to smooth over rough patches, not for one-time expenses. The idea is to draw it down, pay it back, draw it down, pay it back, says Coyne. For capital expenses, especially when you're starting a firm, it's best to use “term debt.” Lines of credit, in which payments include no or little principal, aren't good for permanently retiring debt.

Try to make at least the minimum payment on time. If you don't, you'll incur late fees, your interest rate may rise, and your credit rating will decline.

Envision the end of the line. If you've maxed out your line of credit and can't pay down the balance, speak to your banker. “We'll talk to you about refinancing the debt, giving you some regular payments so you can see an end,” says Coyne.