Tips for Using Business Lines of Credit
Business lines of credit work a lot like a credit card. They allow you to use funds for business transactions, and you don’t have to request authorization when making a purchase. The lender sets a total credit limit, and interest is calculated on the amount used each time. In other words, you only pay interest when making a purchase. This makes lines of credit a flexible and useful tool for owners. Here are a few tips to help you make the most of this type of financing.
1. Calculate How Much Capital You Generally Need
Before sitting down with a lender to set up a business line of credit, first, decide how high of a credit limit you may need. For example, if you own a store that makes frequent inventory purchases, how large are the invoice amounts generally? It’s good to have a credit limit that gives you wiggle room for important purchases, technology upgrades and other opportunities for growing your business.
2. Know Your Business’s Cash Flow
Will you need to use business credit for emergency needs? If you run a seasonal business, then you may want to use your line of credit to assist with capital for essentials during slow times. This type of financing can be useful for payroll, taxes, rent and other vital payments. Take the time to calculate how much money you need between slow and busy seasons.
3. Do Research on the Options Available
Many lenders have more than one option for lines of credit. This allows financial institutions to provide tailored solutions that fit different business needs. If you want a larger credit cap, you may need to be prepared to pay a higher interest rate. On the other hand, companies with an excellent credit rating and several years in business may qualify for attractive incentives, such as a percentage of cashback on inventory purchases.
4. Feel Free To Ask Questions
Sometimes a line of credit also has annual maintenance fees or other related costs. Great lenders aren’t afraid to answer your questions. Instead, you want to work with a bank that takes the time to help you find the best option for your company’s needs. If there’s something you don’t understand, ask the financial expert to explain it more clearly.
5. Keep Building a Great Credit Rating
Once you qualify for business credit, use it! Taking advantage of this capital is good for your company’s growth. At the same time, it also has a positive impact on your credit score. As you pay back your credit and use it to boost your cash flow, it becomes easier to obtain other loans in the future.