CSLB Contractor's Law & Business Practice Exam

Which financial strategy is advisable for a contractor facing temporary cash-flow problems?

1. Requesting a loan from a family member

2. Cutting employee salaries

3. Using funds from a pre-established line of credit

4. Delaying payments to suppliers

The correct answer is: Using funds from a pre-established line of credit

Utilizing funds from a pre-established line of credit is a highly advisable financial strategy for a contractor experiencing temporary cash-flow issues. A line of credit specifically offers the flexibility and immediate access to funds necessary to manage cash-flow challenges effectively. It allows the contractor to cover operational expenses, manage outstanding bills, or fund ongoing projects without disrupting relationships with employees or suppliers. This type of financing is often structured to be more favorable than other forms of credit, such as personal loans or high-interest credit cards, making it a practical choice during times of financial strain. Furthermore, because the line of credit can be drawn upon only as needed, it allows for more prudent financial management and the ability to repay borrowed amounts when cash flow stabilizes. Other options might seem viable but can lead to longer-term issues. For instance, requesting a loan from a family member could strain personal relationships and may not provide a sustainable solution. Cutting employee salaries could damage morale, lead to a loss of skilled labor, and compromise project timelines. Delaying payments to suppliers might harm essential relationships and could potentially lead to disruptions in supply chains or unfavorable credit terms in the future. Therefore, a pre-established line of credit provides a balanced approach, addressing immediate cash-flow needs while maintaining vital business relationships.