Getting a small business line of credit is a good way to get the working capital you need to grow your business without paying more interest than necessary. In fact, many business owners prefer a line of credit because they can save money by drawing only the capital they need and paying it back as soon as possible.
The key to making a small business line of credit work for your company is knowing how to manage it properly. In fact, our business clients frequently ask us for the do’s and don’ts of handling a BLOC. Here are the top eight we think are the keys to success.
#1: DO Read the Fine Print
The first thing you must do is understand all of the terms and conditions of your business line of credit. Some lenders charge significant penalties if you’re late with a payment. Others may require you to bring the balance on your line of credit to zero at the end of every year. Before you sign on the dotted line, make sure you understand every aspect of your lending agreement. If there’s anything you don’t understand, ask – and keep asking until you’re sure you’ve got the answers you need.
#2: DON’T Ignore Fluctuations in Cash Flow
One of the keys to handling your business line of credit properly is understanding your cash flow. If your business has a slow season, you’ll need to plan appropriately to make sure you don’t wind up in a position where you can’t make a payment. It’s a good idea to look at your business history year-to-year to get a handle on what you can expect to earn each month.
#3: DO Withdraw Only What You Need
When you first get approved for a business line of credit, you might be tempted to withdraw a significant amount of money simply to have it in your bank account. You might also be tempted to use the BLOC for something that isn’t going to earn you a return on your investment. A better approach is to evaluate the potential return on any expenditure and withdraw only the funds you need, and only when you need them. That way, you’ll be sure you can pay them back and you won’t get yourself into a financial hole.
#4: DON’T Mix Your Business and Personal Finances
Your business line of credit is meant to be used for eligible business expenses only. If you need money for personal expenses, don’t make the mistake of dipping into your business line of credit for it. That will only get you in trouble with your lender, and it may even cause your lender to “call” your loan – meaning they’ll require you to pay everything that’s outstanding immediately. You can always apply for a personal loan or line of credit if you need one.
#5: DO Pay Back What You Withdraw Quickly
One of the real benefits of a business line of credit is that you will withdraw only what you need. That means you’ll only pay interest on the portion of the line you use. It also means bringing your balance back to zero as quickly as possible is in your financial best interest. One of the biggest differences between a loan and a line of credit is that there aren’t any penalties for early repayment. Take advantage of that and save yourself some interest with a speedy repayment.
#6: DON’T Use Your Line of Credit for Routine Expenses
The purpose of a business line of credit is to help your business grow. That means it’s perfectly acceptable to use it to buy inventory or raw materials, launch a marketing campaign or buy a piece of equipment. However, it’s not really in your best interest to use your business line of credit to pay the utility bill or a new painting for your office. The key is to use your BLOC for things that are going to help you grow – not for mundane daily expenses. Instead, use a business credit card for those expenses and keep the line of credit for the expenditures that will increase your bottom line.
#7: DO Make Your Payments on Time
If you have an outstanding balance on your BLOC, it’s important to make your monthly payments on time. This will help you keep your credit in good standing and avoid problems with your lender. Timely payments can even improve your business credit score over time.
#8: DON’T Avoid Your Lender if You Have a Problem
Finally, if you run into trouble repaying your balance or you have any questions at all about the proper management of your business line of credit, talk to your lender about it. One of the biggest mistakes small business owners make is hiding from their lenders when they have an issue. The best way to avoid negative repercussions is to address any problems that arise head on by talking them over with your lender.
A business line of credit can provide you with the working capital you need to invest in your business. The key is managing it properly – and the eight do’s and don’ts that we’ve listed here can help you do that.
To learn more about Addition Financial’s business lines of credit, please click here.
Posted on Feb 6, 2019
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