How to survive the credit high-wire balancing act

For the business owner, finding the ba-lance between minimizing tax liability and building net worth in the company can be a real high-wire act.

The direct effect will be the amount and type of credit that will be offered by financial institutions and others.

Credit sources

Obviously, no one wants to pay more in taxes than is necessary. But a business can take advantage of many opportunities for growth, and even save money in some instances, if it has access to credit.

Credit is often obtained through banks, but leasing companies, capital markets and vendors all operate on credit and often re-quire it as a stipulation for doing business. Heal-thy companies retain some earnings to facilitate growth and promote longevity. Management of earnings and the balance sheet are key tools in obtaining credit.

Increasing credit options

Credit isn't just a valuable tool in unique situations. Managed properly, credit offers day-to-day benefits as well. Vendor discounts for volume buys, limited-time offers, etc. can require quick action.

Increased leverage with vendors re-sults from properly managed credit. People understandably want to be paid in a timely manner. If your credit is good, you can often negotiate better terms of payment, either by receiving discounts for paying the vendor quickly or extending payments to seize a deal.

Credit increases your options when facing a sudden change, good or bad. But don't wait to establish credit until after the wheel of fortune spins in your favor or a sudden downturn in business looms. When that next-door piece of property you've had your eye on for expansion hits the market, you may have to act quickly. And you may not have the cash to both buy the property and sustain your current business. That "once-in-a-lifetime" purchase of a property or a competitor's business can be possible if you have timely access to credit.

Seeing red

When applying for credit, periodic losses are explainable; however, a trend to red ink raises a red flag with creditors. How do you keep the red flags from flying? Maintain a well-balanced debt-to-worth ratio as determined by the standards for your industry and your current situation. A fact-finding chat with your local lender can be beneficial. It gives you an opportunity to introduce yourself, demonstrate your planning skills and become familiar with general banking credit criteria.

Different banks will focus on different aspects of a business and underwrite in different fashions. Prepare for the standard questions and requests now; it makes dealing with specifics much easier when the time comes. You'll most likely need to supply financial statements and tax returns for the three previous years and the year-to-date. If your business is privately owned, your personal documents also will be re-viewed.

You'll also need to demonstrate:

Sufficient cash flow to operate on a sound financial basis and repay the loan.

If you have adequate equity or investment in the business.

Your management expertise.

The character of the company, you and your managers.

Proof of sufficient collateral.

Remember, if you're like most business owners, you extend some form of credit to your customers. Credit management involves more than not overextending yourself; you need to be prudent in extending credit to customers as well.

Be proactive in keeping your accounts receivable flowing, and take care of accounts payable.

You need to carefully consider when credit can help and when it can hurt. A long-term outlook and financial plan for your business is imperative to knowing when to borrow and when to dip into the cash reserves.

(John Himmel is the vice chairman and chief credit officer of Commerce Bank Springfield Region.)