Is Your LOC Renewal Date In the Wrong Financial Season?

Most LOC renewal dates default to the anniversary date of the agreement’s approval by the lender. If you are lucky, the lender may realize that the renewal date is not in the customer’s or borrower’s best interest. Why is that?

Let’s Answer The ‘Why’ Question With Some LOC Fundamentals

An LOC, short for a line of credit, is nothing more than a bank overdraft up to a certain agreed-upon amount by the bank that is subject to a floating rate. Typically, that floating rate is based on the prime rate.

The purpose of the line of credit is to offset cash flow inefficiencies caused by mismatches between cash leaving the business and cash entering the company.

For instance, assume you are gearing up for a retail busy season. Vendor payments may start weeks or months before cash starts rolling in to offset those bills. Furthermore, money is still needed to meet recurring fixed costs such as payroll, rent, other operating expenses, and debt service, if any.

The job to be done with the LOC is to finance the negative cash flow in situations such as the above. The LOC will be fully paid down when cash surpluses occur.

LOC Renewal Timing

What I’m about to share with you is based on my strong opinions and risk tolerance.

Let’s refer back to the situation above. Let’s assume your net cash position (defined as all cash balances less the LOC balance) is positive, and that the LOC is generally around zero for four months of the year, from February to May.

That’s when I want my renewal date to occur. I want my LOC renewal date to fall around the beginning to the middle period when I’m flush with cash.

Why? Think about it for a minute before you read on.

Is there any guarantee the bank will automatically renew your LOC? In many cases, that may not be an issue or a concern, let alone a risk. But what is the risk that your LOC will not be renewed? Even if that risk is a mere 5%, let the renewal date fall during a period when I don’t need the bank’s money to rent.

In reality, if you meet with your banker monthly or quarterly, you’ll know in advance whether the bank intends to renew your credit line. If that’s the case, I still want this to happen when I’m not stressing over cash.

In short, never let your LOC renewal date fall during a period of peak usage. If so, I’m 100% you can get that date changed. There may be a few small hoops to jump through, plus a one-time lender fee, but the hassle is well worth the amendment to the renewal date.

LOC Risk Management

Even if my LOC renewal date is favorable to my business, let’s not take any chances on losing that credit line with the bank, assuming you like your lender. Here are three tips that you should already know about:

1. If I’m your acting CFO, you already know I meet with your bank monthly to review the financials. There is no better way to generate trust between you and the lender. These monthly meetings increase their confidence in you as a CEO.
2. During the LOC drawing season (when I’m using the credit line the most), I also share my cash flow projections weekly. I do this out of courtesy, and I’ve never received any pushback, only gratitude.
3. Keep the lender on speed dial for any unusual transactions that unfold. This may seem redundant with the first tip, but these calls will probably be needed about once per year.

A perfect example of the third tip has occurred several times with some of the retailers I serve. Occasionally, they will have the opportunity to buy several truckloads of closeouts at an offer that’s hard to refuse, with an expected sell-through rate within 90 days at high margins.

In most cases, I can get the banker to create a one-time bulge LOC for that single purchase without using my regular credit line.

Again, constant communication will lead to more favorable responses on that third tip above.