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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: RockYourSocksOff on June 05, 2015, 08:37:36 AM

Title: Line of Credit or Cash as Safety Net
Post by: RockYourSocksOff on June 05, 2015, 08:37:36 AM
Looking for some feedback on relying on a line of credit for a safety net vs. stashing cash for my business.  I'm trying to pay down my business debt as soon as possible.  I've saved up about 3 months worth of payments in my business savings account.  That's actually enough to pay off my smaller loan which is at 5.65% interest.  I also have a line of credit that I've never used.  My line of credit would get me through maybe two months if the tap completely ran dry which is unlikely.  I wonder if I should use the safety net cash to pay down the loans or leave the cushion.  I'm aware that there are many factors that affect this decision.  Please let me know what other info I can provide and what your thoughts are.  Thanks!
Title: Re: Line of Credit or Cash as Safety Net
Post by: rmendpara on June 05, 2015, 12:02:59 PM
You should definitely have a significant amount of total liquidity... combination of short term investments, cash, committed bank line of credit, other liquid stuff, etc.

I don't know what kind of business this is, so I'll ignore the specific guesses in any direction and keep it general.

The most important thing is to be able to stay liquid. The easiest way is to project some simple and possible scenarios within the realm of possibilities, and how prepared you want to be. So, in the recent downturn from 2007-2010 (somewhere in that period depending on what your business is exactly), how did the company do? How long was the slowdown in sales/profits/cash flow, and what did you have to do to stay solvent and keep things running?

In a future downturn, how much would sales have to decrease in order for you to start losing money to keep the doors open? How long could the business stay liquid if sales dropped 10/20/30%? How volatile is your business/industry overall?

Answering some things like this will help you as you plan how "risk averse" you are and what you would want to be prepared to handle.

You asked about a line of credit. Is it secured? Is it guaranteed? Can they cancel it for any reason? It would suck if the economy went south, you needed the cash, and the bank cancelled the line.

You didn't put in a bunch of info, so I'm speculating a lot here. Just some things I brainstormed as I started thinking about liquidity. I may have gotten a little complicated than necessary. I work in a Fortune 10 treasury dept, and work with liquidity issues all the time, so I see how all the crap hits the fan on at least a monthly basis.

Good luck :)
Title: Re: Line of Credit or Cash as Safety Net
Post by: RockYourSocksOff on June 05, 2015, 01:48:12 PM
Any recommendations on how to determine reasonable liquidity needs?