First, let\u2019s be sure we know what is short in term and what is long in term.\u00a0 Long term debt![\"\"](\"https:\/\/berkonomics.com\/wp-content\/uploads\/2017\/10\/MONEY-300x254.jpg\")
is taken on for the acquisition of fixed assets such as equipment, cars, facilities and acquisitions of companies or their assets.\u00a0\u00a0 Short term debt is often composed of accounts payable to the trade or employees for expenses, payroll liabilities, accrued but unpaid vacations, customer deposits, and the portions of any loans due to be repaid within one year.<\/p>\n
How much can you borrow against company assets?<\/strong><\/p>\n Asset-based financing is common for companies with accounts receivable and \/ or inventories.\u00a0 There are numerous lenders engaged in this practice, including most business banks.\u00a0 Typically, companies may arrange to borrow between 70% and 80% of those non-government receivables that have not aged past 60 days from invoice, up to a maximum amount, or \u201ccredit line\u201d.<\/p>\n [Email readers, continue here… ]\u00a0<\/em><\/span> Other companies have both the creditworthiness and relative size to be able to borrow from private and banking sources without collateral, with unsecured loans.\u00a0 Many of these lines of credit require that the borrower \u201cclean up the line\u201d for one month out of every year, that is to be out of debt with the lender for that period to prove to the lender that the need for the cash is not permanent, used like a long-term loan.<\/p>\n How to get in trouble mixing cash use and loan classes:<\/strong><\/p>\n Numerous companies have gotten into trouble by using the easy availability of these short-term lines of credit, meant for rising and falling working capital needs, to make payments upon long term obligations such as asset loan payments when due.\u00a0 And worse, some even purchase assets such as equipment with money from short term loans.\u00a0 Matching the term of a loan with the life of the asset is an important business principle.<\/p>\n The \u201ccoffin corner\u201d to avoid in cash management <\/strong><\/p>\n Receivables are assets for only 60 days for the purpose of these lines of credit, and the available line can be reduced automatically as receivables reduce with payments by customers or aging beyond 60 days.\u00a0 We all expect new receivables to be added to replace these, but a cyclic business; a disruption in the general economy; a reduction in the company\u2019s revenues would each contribute to a reduction in the amount available for such borrowing.<\/p>\n To avoid the coffin corner of an over-borrowed asset-based line with no cash for working capital, remember that short term borrowings such as these should never be used to pay any long-term obligations or to purchase fixed assets.<\/p>\n","protected":false},"excerpt":{"rendered":" Here is one that is so important to the continued health of a growing company that it cannot be overstated. It\u2019s a bit complex for novices. But hang in there as I explain a bit about accounting classification of … Continue reading