What is Your Company's Debt Ceiling?

Author: John Langenfeld, First National Bank of Omaha Date: February 04, 2014

Advice on what small businesses should keep in mind about credit health

Given the financial challenges of recent years, what can you do to protect and grow your business credit wisely?


All this talk of government debt ceilings may have caused you to think about your own business credit card. Do you have an optimal amount of credit for your company? Too little or too much? Would you be approved for an increased line if you requested one?  Here's some “tried and true” advice on what smaller businesses should keep in mind about credit health.



Q: What advice would you give owners of small- to medium-size businesses about credit?

A: First and foremost, continue to manage your personal credit well. For smaller businesses, you can’t separate the individual’s creditworthiness from the company. As for how much debt to carry, your industry trade groups can provide good benchmarks. An acceptable debt ratio or quick ratio for a restaurant would be very different from a lawn care service or a consultant.


Q: If a cardholder requests a higher credit line, what kind of factors do you review?

A: Similar to when we first extended credit, we’d most likely look at two years of financials, including cash flow, balance sheet and working capital returns, plus the individual credit report. Since we now have a transaction history, we’d see whether the expenses appear to be business related. Plus, is the individual a high revolver making only minimum payments? Revolving is fine and can be a smart business strategy to free up cash flow, but if you’ve maxed out your line, how do you get the liquidity you need for an unexpected opportunity?


Q: How can a new business in particular increase its credit line?

A: In addition to making more than the minimum payment, we have some business cardholders who pay us more than once a month, sometimes even weekly, to establish a good track record. It’s likely that behavior would accelerate our ability to increase their line.


Q: It doesn’t come down to some standard formula?

A: Not at all. Every business is different, so we look at each one on its own merits. We try to get a sense of what its unique needs are and what the owner is trying to accomplish, taking into account the industry, seasonality, payment behavior and other factors. We don’t take a cookie cutter approach.


Q: Is there such a thing as “good debt” versus “bad debt”?

A: That’s an interesting question. I would say good debt is what you can pay back and bad debt is what you can’t! Businesses take on debt for all kinds of good reasons, but it all comes down to your ability to manage the debt on your balance sheet should revenues fall. If you lock in that long-term debt and suddently revenues don’t materialize as many experienced in recent years, that’s obviously where problems begin. You need the flexibility to manage both sides.


Q: If I’m a cardholder having problems, what do I do?

A: Everyone can have a rough time, particularly lately. If that happens, taking the initiative to contact us, showing a willingness to work with us can make a big difference.


Q: How can cardholders get the most value from their card?

A: Use the card for what it’s designed for. When used responsibly, it can be a great asset for your business beyond payment convenience—giving you the flexibiity to respond to the marketplace, to grow and be successful. To that end, it’s not just a travel and entertainment card. You might be surprised how many vendors will accept the card, to pay operational expenses or make capital equipment purchases. And when it comes to fraud, never forget that paying with your business card protects you in ways that paying by checks or cash can’t.


Q: Anything else?

A: As a partner in your business, it’s important to us that you have the credit line you need. Do your part, continue to manage your account well, and we’ll bend over backwards for you.

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About the Author

John Langenfeld is the Director in charge of Underwriting for Commercial Card and Credit Operations for First National Bank of Omaha (FNBO).  FNBO is a sixth-generation family-owned business that is part of the largest privately owned banking company in the nation, and is also an member of NFIB.

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