#34 BUSINESS LINES OF CREDIT Buyer Checklist You Need To Know Before You Spend Your Money. 60 Buyer-Beware Intelligence Points.

1. A line of credit is not free cash.
2. Available credit can disappear if the lender changes terms.
3. Variable rates can increase payments.
4. Interest may accrue on outstanding balances.
5. Annual renewal requirements can create risk.
6. Borrowing capacity can depend on financial performance.
7. Personal guarantees may apply.
8. Collateral may be required.
9. Covenants can restrict business decisions.
10. Lenders may require financial reporting.
11. Fees can include unused-line or annual charges.
12. Late payments can trigger penalties.
13. Default can accelerate repayment.
14. A line used for permanent expenses can become a permanent debt problem.
15. Borrowing to cover recurring operating losses is a warning sign.
16. Seasonal businesses may need more capacity than the line provides.
17. Customer concentration can suddenly reduce borrowing capacity.
18. Receivables may not all qualify for borrowing.
19. Inventory may have limited borrowing value.
20. The stated credit limit may not equal practical availability.
21. Drawing the full line can leave no emergency capacity.
22. Refinancing risk exists if the facility is not renewed.
23. Interest expense can quietly erode margins.
24. A line should support a clear working-capital cycle.
25. The critical question is “What specifically will this borrowed money accomplish?”

B. PREMIUM BUYER CHECKLIST

☐ Credit limit
☐ Interest rate
☐ Fixed/variable
☐ Draw fees
☐ Annual fees
☐ Unused-line fees
☐ Renewal date
☐ Maturity
☐ Collateral
☐ Guarantee
☐ Covenants
☐ Reporting requirements

PURPOSE

☐ Inventory
☐ Receivables
☐ Seasonal cash flow
☐ Short-term opportunity
☐ Emergency liquidity

Avoid using a revolving facility to permanently fund operating losses.

BORROWING-CAPACITY TEST

☐ Eligible receivables calculated
☐ Eligible inventory calculated
☐ Advance rates understood
☐ Concentration limits understood
☐ Borrowing-base formula understood

LIQUIDITY TEST

Model:

☐ Normal month
☐ Slow month
☐ Worst month
☐ Major customer delay
☐ Unexpected expense

FINAL QUESTION

If the lender froze the line tomorrow, how long could the business operate?