Nothing hurts an entrepreneur more than having to turn away new business because there's not enough cash on hand to meet the demand.
Mike Madrid, CEO of The Mike Madrid Co., in West Lafayette, Ind., almost found himself in just such a position. Needing cash in a hurry to complete the takeover of a bankrupt competitor's accounts, Madrid -- whose company services, rents, and sells road-construction signs and barricades -- didn't have time for the red tape of a new loan. He was forced to borrow against an existing line of credit not technically intended for equipment purchases. Eventually, he had to renegotiate it all into an unmanageable hodgepodge of long-term vehicle and equipment loans.
Sufficiently frustrated, Madrid sat down with his banker and set up a "fixed-asset purchase plan" -- a hybrid of a credit card and a long-term loan. The agreement gives him quick access to cash, and the payment structure is designed to accommodate his seasonal cash flow.
Madrid got a $100,000 line of credit earmarked for preapproved items such as trucks, trailers, and office and shop equipment. He makes a monthly minimum payment on the loan: $3,500. But he skips payments from December through March when business is practically nil. Forty minimum payments spread over five years will pay off the loan. Even though the loan provides the convenience of a credit card, the interest rate -- one point above prime -- is no different from what Madrid would pay on a long-term loan.
Here are Madrid's guidelines for negotiating similar terms:
* Approach a bank you have a good track record with. Because Madrid's bank had been approving his loan applications for six years before signing off on this one, it is confident of his ability to pay.
* Ask for more manageable terms, not more money. From the bank's perspective, the credit line doesn't give Madrid any more money than a number of smaller loans would. But from Madrid's perspective it dramatically improves cash flow.
* Don't change your normal ground rules with the bank. Madrid didn't try to get his bank to sign off on any type of equipment he wouldn't normally take out a loan for. He also offered only previously approved forms of collateral.
* Set up good lines of communication with the bank. Madrid phones his banker and tells him what he wants to buy and for how much, then mails a description of the purchase to the bank office. The bank receives financials from Madrid twice a year and makes appraisals of equipment once a year. To date there haven't been any disagreements.
-- Teri Lammers* * *