Tips About Your Line of Credit

A line of credit can be a useful tool for business owners. It can also be a business killer if used the wrong way. Lenders know this and will monitor business performance to ensure you will have the ability to pay back the money borrowed.

You need to have a legit reason for borrowing money on a line of credit. “Walking around money” or contingency funds is usually not an appropriate reason to have a line of credit. If you have a change in trade terms or have a growing payroll that require operational cash flow, a line of credit is an appropriate source of cash. You should never use money from a line of credit that you don’t intend to pay off within a few months to a year.

For lines of credit that are less than $750,000 a lender will not require significant monitoring unless you are in a high risk industry. A typical annual review of your tax returns and financial statements will be all that is asked for. When a line exceeds $750,000 a lender could require a borrowing base of cash, inventory or accounts receivable which is monitored monthly. Other restraints and conditions are normal when an operating line of credit is needed above this threshold.

Most lines of credit are only granted for a one year term. Each year your business will need to prove credit worthiness to renew the credit relationships. If your business struggled in the prior year and is unable to payoff the line of credit, you will need to work out a loan agreement with your lender. If your business is stable or growing you should breeze through the renewal process.

Speeding up collections or pushing out accounts payable can help with operating cash flow constraints. These sources are a bit more creative but could potentially cost less and save you from borrowing more money from a lender. Sometimes a small adjustment to your business sales and cash cycles can reduce or remove the borrowing need all together. This step is often overlooked by businesses especially when business is going well.

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