How To Properly Use A Line Of Credit For Better Business Cash Flow

No comments Cash Flow
blogImage2
Many businesses will run into times where business as usual doesn’t provide enough cash for a company to maintain things such as inventory, employee salaries and other basic necessities. This is common for cyclical businesses, companies that have busy seasons and off seasons. For companies that run into such issues taking out a line of credit might be a good option for them to continue doing business.Before taking out a line of credit a company must decide if they are doing it for the right reasons. Maintaining day-to-day operations is certainly a good reason. But taking on such responsibilities doesn’t come lightly, and each line of credit is not created equal, how your line of credit is secured should be carefully discussed with your banker.Here are some things every business must consider before taking on a line of credit so they best maximize their chances of success in using their credit line.

Is This A One-Time Need?

Often a line of credit is needed for expansion. Purchase of new equipment or capital to increase inventory and the line might be paid back quickly. In these cases it’s important to analyze exactly how the line will be paid back. Banks of course will require this anyways as they will want to know they’ll get their investment back. But it’s important to look closely at how quickly the business itself will get a return on this investment.

What happens if new equipment is purchased and things don’t go as planned? As with any big business decision planning is key and considering all possible outcomes.

Revolving Line of Credit

This use is common for cyclical businesses; businesses that find themselves in need of extra cash flow during slow times. In this case it’s important to access exactly how much is needed, not having enough credit to get through the slow times is as good as not having any credit at all.

As with many things it’s all in the planning. Before taking any line of credit the business must have a strong understanding of all their financial needs. They should also answer the question, why are we so cyclical? Is there anything that can be done other than using the credit line to increase cash flow during these slow times?

Sometimes nothing can be done and this revolving line is necessary. It’s important though that it’s used for it’s original purpose, if the revolving line of credit is for extra cash flow during slow times then that is all it should be used for, it shouldn’t be used for expansion purposes. Having money in the bank can be tempting to pull from for other uses but again stick with the plan and the original intention.

Once You Started Using The Line Of Credit, Never Miss An Interest Payment

Just like a personal credit card you should never miss a payment on your line of credit. This should be one of your top priorities. As not only do you want to get it paid off in a timely fashion but you also want to remain in good standing with your bank in case you need to increase your credit limit in the future. Also remember banks are run by people and people can be understanding so the closer you remain in communication with your banker the better off you’ll be.

You might even consider making extra payments on your line to pay it off quicker.

Overall it’s important to keep in mind that a line of credit is a tool for your business. It is borrowed money and therefore must be paid back so any activity it is used for should be specifically related to growing the business or keeping afloat in times of need. As with any tool it needs to be followed and managed closely.

If used properly a line of credit can be one of the best tools available to business looking to grow or just staying in business.