Manage Your Line of Credit Carefully

Feb 24, 2017 by Andrew Clark

Many veterinary business owners choose to withdraw almost all the cash from the practice at the end of the year.  What this usually means is that the owners use an ‘operating line of credit’ ‘OLC’ to meet the cash flow needs of the business for the first few months of the year.  The catch is that the OLC MUST be paid down to zero by the end of the year. 

Opening an OLC is simple if your practice is financially sound.  Paying the OLC down to zero can be challenging.  You have borrowed OLC because you didn’t have enough money in the bank to pay the bills.  You must budget to pay the full year expenses PLUS pay off the OLC.  This may be the equivalent of 13 or 14 months’ expenses to pay off with 12 months of profit. 

It is common for a veterinary business, in a year with poor practice financial results, to fail to generate enough cash to pay off the OLC.  In that situation, the bank MAY choose to extend the LOC one more year.  Now you have started down the slippery slope, each year increasing the expenses you must pay by the end of the year.  Each year becomes more difficult until one year the debt is impossible to pay off and you must declare bankruptcy or have an infusion of free cash.  (free cash is very hard to find). 

The point of this blog is to encourage you to be vigilant and pay off your OLC as quickly as possible to avoid the danger of entering next year with unmanageable debt. 

Better yet, leave enough cash in the business in December to cover 6-8 weeks of expenses early in the next year. 

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