Follow this formula to line up new financing

Most companies have revolving lines of credit in place with lenders — in other words, banks, or perhaps other asset-backed lenders. The purpose of these credit lines generally is to provide day-to-day working capital to help smooth out any bumps in cash flow during the ordinary course of business.

Why should management consider obtaining such a credit facility? You never know if your company might experience a brief hiccup in cash flow at an inconvenient time.

For instance, what happens if you need to fund payroll with a large collection coming in on Friday, but payroll is going to happen on Wednesday? If you haven’t already lined up some sort of contingency financing, the company is going to have a problem.

My experience is that the time to put this sort of credit facility in place is when you don’t need it. It takes time to establish such a line of credit: The company must provide certain data to the bank, the bank must do certain credit analyses, documents might need to be negotiated, etc.

What is a bank looking for in a company that is vying for such a credit facility? Bear with me here while I use a few accounting terms:

• Positive equity. If the company has negative retained earnings on the balance sheet, it is going to be tough for a bank to be able to qualify the company as a strong credit, capable of supporting debt.

• Reasonably consistent financial performance. If earnings have been erratic or non-existent, a bank may have a difficult time getting comfortable with the idea that the bank can support a loan.

While banks may decline to participate a loan to a company with a less-than-stellar financial history, there are other asset-backed lenders who may have an interest in such a deal. You can expect to pay somewhat higher interest rates or fees, but you may still be able to get a deal done.