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Question :
Hi,I have a small beekeeping and transport business. I currently have $9200 in the business bank account. I have a monthly loan repayment of $495 coming out. I also have a business line of credit that i have never used. Its interest rate is at 10.85%. I have an unexpected cost that came up with a truck of mine which will cost $5905. I also have to buy some more bees at $2020. That will leave me with around $1275 cash in my business bank account for the month of April. Cash will start coming in around June 1st at $1000 a week.I am wondering if it is better to spend my cash from my bank or use the line of credit instead? just incase another unexpected cost comes up

Question submitted 04/04/21 @ 01:14pm
Industry: Funding & Finance
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    Morning – good questions, the first thing I would ask is ‘what is a normal month for the business’ ie if all things are going well, how much do you typically bring in a month and how much goes out a month – to work out how much you typically make in a month.

    Right now, from what I can see your bank balance end of April gets to $780 and then in May after making the loan repayment it is $285 and then hopefully it kicks back once the $1k payments come in from early June. I might have assumed you make a loan payment after your $9,200 balance which might be wrong.

    If I look at your specific question, if you used the line of credit, say $5,000 then your interest is 10.85% so if you borrowed that for a year, then on straight line basis you will pay $580 in interest – however the interest compounds up over time if you are not making repayments over the interest cost per month, so it might be more that you take 3-6 months to the credit facility back to zero – so you will be paying the bank for 3 months use of their money – interest plus any fees they may charge. To roughly work out, just times the $ you need by 10.85% and divide by 4 and then add a bit if you are not repaying more than the interest to start with. Key is repaying or reducing the balance more than the interest cost.

    Overall – I would say, how likely is it that other expenses could come up between now and June when the cash flow kicks in – and do you need to have a safety balance? Unless you can just draw down the line of facility?

    The cost of the facility at 10% is a high rate – because it is a standby facility.

    I am not sure I have helped – key question, do you need a safety balance in the bank or not? Also, how certain are you of the June revenue coming in – if not, then getting some safety zone in your cash reserves may not be a bad idea.

    Note, I am not a financial advisor, nor providing financing advice!

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    Hi there- great questions
    In response to your main point. Usually the cost associated with using a line of credit outweighs the interest on the cash you would receive in the bank. Therefore usually using the cash will be your best option, assuming you will continue to have access to the line of credit. Obviously we don’t know the full extent of your personal financial situation and as such this is just general advice.

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