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Here is a rule for companies with outstanding loans

Here is one that is so important to the continued health of a growing business that it can not be overestimated. It's a little complex for novices. But hang in there as I explain a bit about the accounting classification of assets and liabilities.

Differences Between Types of Assets and Liabilities

First, let us be sure that we know what is short term and what is long term. Long-term debt is contracted for the acquisition of capital assets such as equipment, cars, facilities and acquisitions of businesses or their assets. Short-term debt is often composed of corporate or employee accounts payable for expenses, salary expenses, accumulated but unpaid leave, customer deposits and the portions of loans that must be repaid in the future. # 39; year.

How much can you borrow on the assets of the company?

Asset-based financing is common for companies with accounts receivable and / or inventory. There are many lenders involved in this practice, including most of the business banks. As a general rule, companies can arrange to borrow between 70% and 80% of non-government receivables that have not spent the last 60 days from the date of issuance of the invoice, until 39, up to a maximum amount.

Other companies have both creditworthiness and relative size to be able to borrow from unsecured private and bank sources, with unsecured loans. Many of these lines of credit require the borrower to "clean the line" for a month each year, that is, the lender will not be indebted during this time to prove to the lender that the need for money is not permanent, used as a long term loan.

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How to get into trouble by mixing classes of cash and loan use:

Many companies have experienced difficulties using the easy access to these short-term credit lines, designed to meet the growing needs for working capital, to make payments on long-term bonds such as the repayments of assets. And worse, some even buy assets such as equipment with money from short term loans. Associating the duration of a loan with the life of the asset is an important business principle.

The "corner of the coffin" to avoid in cash management

Receivables are assets for only 60 days for these lines of credit, and the available line can be reduced automatically as receivables decrease with customer payments or age beyond 60 days. We all expect new claims to be added to replace them, but cyclical activity; a disturbance of the general economy; a reduction in the company's revenues would each contribute to a reduction in the amount available for this loan.

To avoid the coffin wedge of an over-borrowed credit line without working capital, remember that such short-term borrowings should never be used to pay long-term bonds or to purchase bonds. assets.