The Best Time to Get Credit for Your Business? When You Don't Need It
One lesson of the pandemic: It's essential to prepare for the bad times when times are good.
Like most, I spent some of my career with a big corporation. By 2008, I was Chief Innovation Officer at a company that was one of the largest issuers of credit cards to small businesses. As the recession hit, more and more of my colleagues were being laid off. Finally, on one Friday, it was my turn. On my way home from being laid off, I deposited a check for my full home equity line of credit that had been sitting in my desk, unused, for the last 7 years. I started my company, MultiFunding LLC the next day.
I tell this story because I believe it fits well with the current uncertainty we are facing with our economy. When I took out that home equity line 7 years earlier, I had no plan for it and had no idea what I would ever use it for. However, I knew that I would inevitably face unexpected hardships and unexpected opportunities at some point in the future. I recognized that getting the home equity line now, while I was financially stable enough to be approved, was the right choice. Had I not done that, I have no idea what I would have done after being laid off.
That is why I always tell entrepreneurs and small business owners, "the best time to get a loan or line or credit is when you don't need one." The obvious question that always follows is, why? It is incredibly more difficult, and near impossible, to get financing when you're at the bottom of the trough versus the top of the hill.
Another question I like to ask entrepreneurs is: "If you were allowed to double the size of your line of credit tomorrow, what would you be willing to pay for it?" Again, I hear the answer: "I am not willing to pay a penny as I don't need it." I encourage those entrepreneurs to think again. Liquidity provides leverage and insurance, especially for small business owners. Try thinking about the line of credit like an insurance policy. How much life insurance do you have - and what premium do you pay for it? You are paying for the security that loan or line of credit provides you.
The home equity line I had taken out on my house served as insurance when I lost my job, but also allowed me the opportunity to start my own business. Don't forget that not having these tools in your back pocket could leave you empty handed and stunt your business growth if an opportunity arises and you don't have the financials to take advantage of it. For example, a restaurant owner could be faced with an opportunity to buy an adjoining space and expand their business, but may not be able to seize that opportunity if they haven't the cash flow or liquidity on hand to support it.
Almost everyone I know suffers from a short memory. When things are going well, we think it's going to be that way forever. But if Covid taught us anything, the world can change on a turn of a dime - often in ways we can't predict or expect. So don't think about your line of credit around today's situation. Instead, look into the future, and consider the unexpected.
