Is there a right credit facility for my business?

Recently I have been working with two large companies with turnover in the hundreds of millions range. These businesses have had a fair amount of success and possess knowledgeable management teams yet they still make choices that limit their ability to run their business and maximise returns. What these two companies have in common is that both of them are using the wrong banking facilities (loan type).

If your wondering what is the big deal about not using the "right" banking facility is it is that each product the bank sells has different fees, levels of interest and restrictions on how you can use the facility. Using a facility for something it was not intended for costs you extra money in fees, in time dealing with your bank to explain what your doing and most importantly opportunity cost. The wrong bank facility impairs your ability to pay for things your company needs when you need them.

Using the example of the two companies you will see how wrong you can get your use of credit facilities and the impact it could have on your company. Company A has a working capital facility with $10-$20 million. The working capital facility is meant to be used for paying creditors and used day to day to manage cash flow variances. Company B also has a working capital facility but it is only for around $5 million. Both companies are around the same size.

Now what each company is doing with their facility will show you why it is important to have the right facility.
Company A has used their facility on capital expansion, the purchase of fixed assets. This is not really what this facility is intended for and these purchases would have been better off being financed via a lease or through a specific loan secured over the assets. Financing the assets with the working facility is costing them an added premium for the flexibility this type of facility provides and it is secured over the fixed and floating assets of the company. This has exposed the rest of the company to unnecessary risk and risks using up the facility for when it will be needed for its intended use.
Company B requires their working capital facility for paying trade creditors and other day to day costs. The size of the facility is clearly quite small compared to the revenue turnover of the company (several hundred million) and smaller than Company A's facility. They are in a bit of a squeeze now as a key debtor is unable to pay for a period of a few months. This has left them with a loan facility too small for their business. Company B failed to plan ahead and organise contingent lines of credit with their bank in case of an event like this.

As you can quite clearly see selecting the right type of financing is vital to keeping your business healthy by isolating risk, reducing costs and allowing for unexpected surprises.

Take time to look at your facilities and consider if they are best suited to the way you use them or is there a better facility for you. Using the right product today may well help you cope when a surprise comes your way and you need to fall back on your debt facilities.
As your business changes so too should your debt facilities and debt structure. Talk with your bankers if you think you need to change your facilities you never know what savings you may make.