The prudent use of credit can help a business sustain success and meet goals. Many businesses rely on loans, lines of credit and other financing tools to manage cash flow, invest for growth and stay competitive. The key to using this strategic resource is to choose financing wisely and manage it with care.
Peter Foley, Merrill Lynch Wealth Management & Business Financial Advisor and Vice President of The Foley Group of Merrill Lynch, Miami, Fla., shared his insight into how to avoid lending pitfalls and leverage debt strategically.
Q. When considering a lender, what should a company look for?
Foley: A business owner should look for a lender that understands the totality of their business, including everything from personal assets and the business to retirement plans. With this kind of support, you can make business financial decisions within the context of your total financial picture.
You also want someone who understands your industry and can help you in ways that go beyond lending. For example, we get to know exactly what our clients do and, when we can, we help them network. We recently connected an Exxon client of ours with a cruise line client and they are working closely together. To find this kind of person, ask someone in your industry for a recommendation.
Q. How can a business use debt as a strategic tool?
Foley: In the old days you fulfilled business and were paid. Now, companies are getting larger and payment is slowing down. Therefore, working capital can be crunched. Most businesses need working capital to deal with the delay for adding equipment or employees, and there is nothing wrong with that.
Q. How should businesses evaluate a financing choice?
Foley: Look at your relationship from a total cost basis, not only “what fee am I paying on this product and what return am I getting for a short time on another.” This will enable you to see if your total financial management solution is working for you and your company.
For example, if you have access to account-linking and interest-bearing accounts you may be able to gain the float benefits that big financial institutions typically get. By having your disbursement accounts, your savings and your other accounts all linked, you can pay down debt whenever you have money and only access capital when you need it. You benefit from the float.
For example, in South Florida we have a lot of seasonal businesses, so we have clients who might have excess capital at certain times of year. If a business has a million dollars in an account that pays 2.25%, that is a good place to park excess funds, even if only for a short time.