In the U.S., there are an estimated 33.2 million small businesses. For many of them, dealing with income challenges, handling unexpected costs, or accessing enough funds to seize unanticipated opportunities isn’t easy. As a result, many turn to business lines of credit to improve cash flow, giving them a resource they can tap into as needed.
However, business lines of credit can become hard to manage if they aren’t used appropriately. Here are some tips for managing your business line of credit effectively.
Have a Plan for the Funds
As with any financing, having a plan for the funds is a must. It allows you to act proactively and strategically, ensuring you aren’t tapping into the available credit line more often than is wise. Know precisely what you do and don’t want to use the money for, and have a plan for repayment before using any of the funds. That ensures you’re taking the time to make wise choices, preventing the accidental creation of further financial challenges.
Fluctuate Your Usage
In many cases, it’s best to fluctuate your usage of a business line of credit. Essentially, after a period of using the credit line to handle expenses, stop for a period and work on eliminating the balance. That can help show the lender that you’re acting responsibly, which can lead to a more positive relationship that you can potentially leverage later. Plus, it can stop you from running up a balance that you can’t manage, as you’re focusing solely on repayment during part of the year.
Save It for Short-Term Purchases
Generally, it’s best not to buy long-term assets using a line of credit if you can’t pay the balance off almost immediately. For example, business lines of credit may not offer the best terms on equipment purchases compared to lease arrangements or collateralized loans.
Often, the interest rates on a collateralized loan – using the equipment itself as the underlying asset – are lower. Similarly, lease agreements may be more cost-effective than buying if you need to use a business line of credit for the purchase.
As a result, it’s usually better to focus on short-term needs that you can pay off quickly. By doing so, you can minimize the amount you spend on interest, particularly if you may need to carry the balance for an extended period.
Stay Aware of Costs
When you have a business line of credit, being aware of the costs is essential. On the low end, interest rates may be near 8%. However, they can also exceed 60%. As a result, even allowing a small balance to linger can cost a significant amount.
Plus, business lines of credit can come with a variety of fees. While origination fees occur with many lending products, processing and maintenance fees can significantly increase the cost of having a business line of credit.
Similarly, even when the fees are reasonable, if the monthly payments get too high, that’s problematic. It can increase your odds of missing a payment, creating a situation that can quickly spiral out of control.
