For financial stability, it’s crucial for small businesses to have speedy access to funds as well as payment flexibility. After all, it’s common for such businesses to experience cash flow gaps and slow incoming revenue. When times become challenging, it’s comforting knowing that extra funding is available.
That’s where a business line of credit can really come in handy. You can access funds as needed and just pay interest on the amount drawn. Still, you must make sure you’re making optimal use of your line of credit. Here is how to make the most of one.
What is a Business Line of Credit?
With this financing tool, which works like a credit card, you can draw up to a limit preset by the lender. You can then repay the amount drawn and draw again — and only pay interest on the amount drawn. And stellar credit isn’t required to get a line of credit.
Contrast that with a traditional small business loan, which has more stringent eligibility requirements, and which pays a single lump sum.
Businesses typically use a business line of credit to bridge cash flow gaps, bolster inventory, or to cover unexpected expenses or other short-term financing needs.
How to Use Business Line of Credit In a Best Way
Here are the top ways you should use your line of credit for your business:
1. Use it Strategically for Positive Returns
Instead of day-to-day operational expenses, you should seek to use your line of credit for prioritized investments that allow you to grow your business, maximize returns, and maintain financial flexibility without taking on unnecessary debt. This can mean, for example, buying inventory or funding short-term growth opportunities.
2. Avoid Excessive Reliance
A business line of credit credit is great to have, but you shouldn’t overly depend on it. Doing so is risky as that can result in long-term debt without generating the returns to cover it. It can also restrict access to other credit options, hurt your credit rating, and impede your business growth.
3. Only Borrow What’s Necessary
Just as you wouldn’t over-utilize your revolving credit card, you should only borrow what’s necessary from your line of credit. This way, you avoid accumulating unnecessary debt, maintain financial flexibility, and keep costs low without unduly straining your finances.
4. Have a Repayment Plan
Before you start drawing from your credit line, it’s important for you to have a solid repayment plan to help you avoid unmanageable debt accumulation. You can also minimize interest costs and avoid prospective financial strain if you can’t repay funds on time.
5. Pay More Than the Minimum
Sure, it’s easy to just make a minimum payment, but most of it will go toward interest. On the other hand, if you always pay more than the minimum, more of your payment will go toward lowering the principal. In turn, the quicker you reduce your principal, the less interest you must pay over time.
6. Avoid Late Fees
Good management of your small business line of credit also means avoiding late fees, which you’ll have if you don’t make timely payments. Such fees can add up fast, heightening your overall borrowing costs and unfavorably impacting your credit score. To avoid them, it’s a good idea to use an automated system or calendar to remind you of payment due dates. Your lender may also permit you to automate your payments, ensuring that you don’t miss a deadline.
In Summary
Just because you have access to a business line of credit doesn’t mean you’ll use it to your full advantage. Employing the above best practices will ensure that you do.
