How to Negotiate a Line of Credit

When Robert Joseph opened R J Construction Co. Inc. in 1993, he capitalized the business using $20,000 in personal savings. Three investors (relatives and former co-workers he has since bought out) also had an equity stake in the company. At the time, Joseph did his personal banking with Wells Fargo, so he opened up his business account there as well.

R J Construction, in Missouri City, Texas, is a general contractor/commercial construction company that works on projects such as industrial wastewater treatment plants and sanitary pump stations.

“We were five years into the business before we were profitable, generating $1 million in revenues,” says the 49-year-old civil engineer. “That’s when we established an initial line of credit with Wells Fargo for $100,000.”

For most construction companies, winning a bid on a contract is just the beginning, since capital is needed up front to purchase materials. Joseph used the credit line as working capital so he could meet his contractual obligations.

Today, R J Construction’s largest client is the nearby City of Houston. For the past eight or nine years, the company has carried a workload of about $7 million a year and completes about $4 million of that.

“What we do is specialized, so there’s always been work,” Joseph says.

R J Construction taps its revolving line of credit–now $350,000–roughly three times a year, but the funds get paid back within three to six months.

“Some projects are more equipment intensive than others,” says Joseph, whose company employs 12 full-time workers including his wife of 27 years, Barbara, who works as the office manager. “We also like to make sure our vendors get paid up front,” Joseph adds.

As Joseph’s example illustrates, businesses typically use a line of credit to maintain or expand a business–not start a new one. A line of credit provides business owners much-needed short-term working capital to meet payroll, pay vendors, or purchase raw materials. According to the National Federation of Independent Business, 86% of small businesses use some type of credit from a financial institution–76% possess a credit card, 47% a credit line, and 31% a business loan. Failure to obtain credit is associated with having low credit scores, a large number of mortgages outstanding, fewer unencumbered assets, and being located in states hit hardest by the housing bubble.

Loan officers need to understand the condition of the business and its prospects, says Bank of America small business executive Robb Hilson. Shaun Coard, senior vice president and business banking manager at Wells Fargo, says the owner’s financial information is used to determine his or her net worth; the company’s is used to analyze trends in annual sales, net income, and equity in the company.

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