Considering a Business Credit Line? 6 Things to Know
When you run a business, you never know when you'll have a financial emergency. A client could miss a payment or equipment could break down — or you could just have a slow month. With a business credit line, you have a backup source of money.
Here's how it works. You apply for a line of credit with a bank or other lender. If they approve, they'll set a borrowing limit. But it's not a straight loan where you get a check. Instead, you can withdraw money up to the borrowing limit. After you pay the money back, you can borrow again.
Say you have a $50,000 credit line and use $10,000 to buy new equipment. You'll have $40,000 left and will owe interest on the $10,000 you spent. Once you pay back that money, you go back to your original $50,000 limit.
Follow these tips to get the most out of your credit line without putting a serious dent in your finances.
1. Pay Off Debt Quickly
When you take money out of your business credit line, the bank starts charging interest on it right away. It's not like a credit card, where if you pay everything off by the billing cycle, you don't owe interest. Let this motivate you to pay off your debt quickly.
2. Check for Restrictions
Some lines of credit have rules about what you can spend your money on. For example, the Small Business Association offers a Builders Line for general contractors and builders. It only allows you to use the money for labor and material costs. If you misuse a business line of credit, the lender could cancel it.
3. Consider Online Lenders
Qualifying for a large enough line of credit with a bank can be challenging, especially when your business is starting out. If you can't get enough money from a bank, online lenders like BlueVine and Fundbox also offer business lines of credit.
You can qualify online more quickly, with less financial history and a lower credit score. The trade-off is that these lenders charge higher interest rates, so be cautious about how often you borrow.
4. Study the Fees
Different fees may apply to the various ways you access your line of credit. For example, Wells Fargo lets you take money out for free by writing yourself a check or by making purchases with the debit card they provide. If you use the debit card to take money out of an ATM, though, you're charged an extra three percent fee on top of interest. Avoid expensive mistakes like this by doing your homework on your lender's fees.
5. Apply for Regular Increases
After a year of using your line of credit responsibly, see if your bank will increase it. Remember, as your business grows, your emergency expenses will grow, too. By applying for regular increases, your line of credit will keep up with your needs.
6. Spend Only When You Need To
Remember, a business credit line isn't cash in your bank account. It's another form of debt, just like a loan or your credit card. Whenever you draw on your line of credit, the interest charged is one more expense. And if you max out your credit line on non-essentials, you could be stuck when you really need money. So be conservative about when you use your line of credit.
Follow these tips for smart credit-line management, and you'll keep your business in the black.