By Guest Author Bill McDermott
The situation was this company had a line of credit with a bank that was unhealthy. However, the company was highly leveraged too making it a difficult combination.
How do you get a line of credit to a highly leveraged company? Personal collateral. Both owners had significant equity in their homes and were able to fund equity lines of $468,000 to contribute capital in to the company. They could’ve pledge the homes also, but wanted to inject funds in to the business to reduce AP. The bank that funded the line of credit also funded the equity lines.
The company was able to replace their existing line of credit with a new one at a lower interest rate and better terms. In addition, the $468,000 of funds injected in to the business gave the company the needed funds to reduce leverage and pay down AP to avoid a 1.5% monthly charge from the supplier on the unpaid balance. The lower rate on the line combined with eliminating the 18% annual cost on the accounts payable had a real positive impact on the company’s bottom line.
The owners will be able to take distributions from profits to reduce the equity line balances over time.
Sometimes, it just takes a little additional collateral to turn a bad situation in to a good one. This was a real win-win for the company and the bank.
McDermott Business Solutions