# Do many Pro shops use LOC



## fge (Sep 8, 2008)

So I had a conversation with a new friend. He used to run a good sized shop before going out of business. He gave me advice, collect debts well. He stated he had several thousands he did not collect and financial trouble resulted. He advised banks pulled his LOC and he was done.

So far we have paid cash for everything, tools, labor, material, overhead, etc… We do not have any credit lines. We are even building a 40*80 metal building with cash. We poured the concrete last week. No bank can close us down. Most of our equipment was purchased used and at very good prices. After our building is done, I hope to add some larger machines from machinery max.com like an edgebander, small CNC and just a few extra machines with cash.

All this said, it does get tight from time to time. But even when cash gets low, i dont want any financing if I can help it.

So I wonder how other shops get by sometimes. I do run low on cash sometimes, even during busy times. Currently we are owed 20,000 for work completed, and soon we are owed another 15,000.00 for work that will be completed. Since opening in 2010, we have around 23,000 in bad debt owed to us I am not able to collect on. I see it as 'school of hard knocks'. I know what things factor into not collecting bad debts so I look forward to making some minor changes that should minimize these past issues. But the fact that our overhead is minimal and we have no LOC, I feel secure.


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## a1Jim (Aug 9, 2008)

Your doing it the same as I do ,low overhead,no debt. When you need equipment save until you can pay cash.


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## TheDane (May 15, 2008)

We did a $25K business development loan (backed by the city) when we first started up in 1998 … used it to acquire equipment. They required a LOC, which we set up through a local bank. Never used it, and as soon as the loan was paid off, we closed it.

I learned a lot by watching my Dad. He had an auto repair and towing business, and was always busy as a beaver. The only problem was, he extended credit to way too many people, owed way too much to his suppliers, and eventually had to sell out and settle for pennies on the dollar.

Running a business on a cash-flow basis can be tough, but if you are disciplined enough it can be done. We set strict payment terms and enforced them … never allowed ourselves to get wrapped around anybody's axle.


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## fge (Sep 8, 2008)

Thats been some of my rookie business lessons, getting hooked on someone else axle being to easy on customers. But I am a thinker and tend to learn from past mistakes, sometimes just not as quick as I need to.


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## TopamaxSurvivor (May 2, 2008)

I have always done the same. Before I started business, I talked to a few bankers. One advised me to keep my job. I was told banks don't want to know restaurants, fishermen or contractors exist until they have been in business and survived at least 5 years. I told him I would not need a banker in 5 years and I didn't ;-)) Well, maybe I do need a baker because nobody ships gold bullion, but certainly not for business credit.


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## toddc (Mar 6, 2007)

I use the client's money to pay for their materials.

I will only work for a couple of other contractors because it is common business practice by many companies to not pay in full and to take more than 30 days net.

I pay cash or pay with credit card backed with cash in hand on all purchases. I tightened things up a lot when the recession hit. It keeps me out of trouble.

I have lines of credit and contractor accounts but never use them. Well, other than having the account to get the contractor discount which is a freaking joke.


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## TopamaxSurvivor (May 2, 2008)

Taking more than 30 days is getting to be a joke. Major corporations can be 9 months or more to get cash in fist ;-( Guess they are all beginning to follow the Wal-Mart lead of selling the product, restocking the shelves, selling it again and restocking the shelves before paying for the first item. I read about that on Morningstar or another financial newsletter about a decade ago.


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## Loren (May 30, 2008)

Read Robert Collier's "Letter Book" - it contains some very
good collection letters. Letters are a lot cheaper than
other methods, even if they don't work very well,
they work sometimes and repay the investment
in sending them.

Aside from this issue, you might consider that only 
doing custom work traps your business in a vicious 
cycle of cash flow problems which you can 
mitigate by developing a line of one or more p
products which buyers pay for in total, up front.


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## huff (May 28, 2009)

Jerry,

Money management (cash flow) is always a major concern for any small business, whether it's working strictly as a pay as you go or using borrowed money to keep things going.

Working with contractors may keep you booked with a lot of work, but the downside is you are allowing someone else to manage your cash flow. Are they as good at managing your cash as you are and are they as concerned about paying your bills on time as you are?

That's always a tough trade off. I ran my business a little differently then most, but at the end of 27 years of building Custom Furniture and high end Cabinetry, nobody owed me a penny, never had to file a lien against anybody or their property and only had to take one customer to "small claims court" simply because they wanted to cancel a special order and wanted a deposit back (Judge ruled in my favor).

Personally, I think you are better off doing things the way you are now and even though you may have some tough times, it's a lot easier to adjust to slow times if you are debt free.

Keep up the good work and can't wait to see that new shop.


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## unbob (Mar 10, 2013)

I found even companies that want to delay payment for a month, will pay up up front if you refuse to go along with that nonsense. That is, if they really want your services.


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## TravisH (Feb 6, 2013)

It all depends on the individual. Most don't like to admit it but they have no place running a business. Many that make it are still run very poorly and would have made a lot more money if someone with the know how had managed the place or that individual would have been done financially better working for someone else (many find the not working for someone very liberating and say it makes up for that but many of those could never admit they would have been better off not being their own boss).

I would say that cash basis is the best method for many small businesses of this nature.

Payments by companies are definitely getting extended longer and longer. I think the place I work at routinely waits nearly 3 months before paying for service. Now some don't like that, as mentioned, and payment is done upfront for those instances. During the course of the year that 3 month lag time equates to a nice chunk of change being invested for the company.


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## fge (Sep 8, 2008)

Thanks for the input. Certainly I am not proud of some if my early bad business deals, but I have learned a ton from them. As our craftsmanship skills have gotten much better with every job, I'm certain my ability to collect will get better as well. Thanks for the input everyone.


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## fge (Sep 8, 2008)

Oh yeah, we actually deal mostly with by owner customers who pay quickly. And while we have done commercial, I am going to try not to do commercial anymore, mostly due to slow payout.


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## LeeBarker (Aug 6, 2010)

A very good question, Jerry, and I have enjoyed hearing the wisdom you've received in turn.

Let's look at this from this angle: It is possible that just having a line of credit could be a stress reducer.

My LOC was reasonable in terms of interest. The only other cost was an annual fee. I think it was $100.

Would it be worth a hundred a year to just know that if you needed to, you could pay a material bill (and get the discount, which adds up over a year) and repay the LOC with certain money that just wasn't quite in hand yet?

I comment you, and others who have posted here, for your aversion to credit in general.

I see that Dave Ramsey now has an entrepreneur program to go along with his Financial Peace University.

Kindly,

Lee


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## fge (Sep 8, 2008)

Yeah it probably could help with some stress right now, or from time to time. We are strained my financially as a result of pouring a lot of cash into our building project. But while cash may be tight I also know we finished a job friday that will replenish our acct adequately. And we have 2 more jobs that will wrap up over the next 2 weeks as well.

To add more details, we lost real estate properties in FL back in 2009. It was during the market crash. We were highly invested in FL. Ooooops! So I never filed bankruptcy, which was probably not the smart move. Now I just never look at my credit. I have no idea what it is but I doubt it says anything good. But we were in the same boat as many thousands were in at that same time. One of our FL homes had a value of 300,000 when the market was healthy, in the crash the value sunk to around 40,000, or just basically what the land was worth that the nice home sat on. So basically in the crash homes were free as long as you could to pay for the land it sat on.

Its just life sometimes. No real big deal. We opened our shop in 2010 and have been happy since. In a couple years from now we intend on breaking ground and building our home, which we will pay cash for as we go. We own our land so we are fortunate with having the land, which was just raw acreage out in the country before we moved onto it.


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## TheDane (May 15, 2008)

Jerry … I don't even know (or care!) if I have a credit score any more.

Lee mentioned Dave Ramsey … I highly recommend him. He has been a great source of common sense advice for me and my wife for the last 10 years or more.


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## TopamaxSurvivor (May 2, 2008)

*Most don't like to admit it but they have no place running a business.*

Very well stated. It took me a few years to figure that out even though I made a lot of money and was very successful. I am about craftsmanship, quality and customer service and satisfaction. Business is about money; maximum money, generating large profits and cash flows without doing anything of value for the customer if possible. It is about creating an organization some fool will buy from you. Any failure on your part is the customer's problem in business. I believe most of us small craftsman/ entrepreneurs see any failure on our part as our problem, a customer service issue and we take care of it to the best of our ability.

You definitely need a cash supply on hand if you deal with large slow payers. Never deal with the government if you do not have a bureaucracy large enough to match wits with them~!


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## SamuraiSaw (Jan 8, 2013)

For me, an LOC is a safety net allowing me to "float" if need be. There are self imposed rules. I only use it for absolute necessities, and I never carry a balance past 30 days. While I am a huge fan of Dave Ramsey, I believe credit can be used wisely and prudently to smooth out some of the bumps.

That being said, keeping yourself debt free is wise indeed. That certainly keeps the stress level down.


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## Loren (May 30, 2008)

If you set up so your shop has capacities to confidently
execute work most shops cannot do, then you can
get the jobs on your own terms. Banging out boxes
with doors is tempting to stick with because once you
are set up for it the work goes efficiently and everything
is predictable, but that also makes it easy for competitors
to muscle in on your market. When there are a lot of
suppliers competing in a market, dishonest people will
find ways to take advantage of shops hustling work.


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## ShaneA (Apr 15, 2011)

If you are in a position to qualify for line, and the set up costs aren't too high. I think it would be good to open one up. Better to have it, and not need it, than to not have it and need it. Because more than likely, if you were to need one, it would be a time where qualifying and timing would be stressful.


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## 33706 (Mar 5, 2008)

Ohhh, a line of credit!!! I thought you were talking about that cruddy cleaner from Amway…..L.O.C.


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