3 Ways to Best Utilize a Business Line of Credit
Business lines of credit
A business line of credit is a very specific lending product designed to bridge the gap between a company’s buying and selling cycle. Lines of credit can be in the form of a secured or unsecured extension of credit, depending on each business's unique financial make up. It is a powerful tool businesses can use to support their operating expenses, finance inventory or accounts receivables. Ultimately, a line of credit can be a tool to help growing or seasonal businesses reach the next level.
Often we see a line of credit used incorrectly. Below are a few tips to help your company best utilize a business line of credit.
- Determine if your company is a good fit for a line of credit. Companies that typically need a line of credit are those experiencing growth that need short-term financing to build inventory or finance accounts receivables. Mature companies or industries with seasonal sales cycles, such as retailers or wholesalers getting ready for the holidays, may use a line of credit to purchase inventory in preparation of their busy season.
- Know exactly what you plan to finance and when you can pay it back. Be upfront with your lender and yourself. It won’t do your business any good to secure a line of credit, and use it to purchase equipment or inventory if you can't repay before the line matures. Most business lines of credit mature within one year. Banks have a variety of lending products that can be customized to the business cycle. Know what you need the money for and when you can pay it back.
- Be ready to talk to your lender. As with any type of financing, your lender will want to see comprehensive and updated financials. Yes, this may take time, but it is an opportunity to have a fresh, knowledgeable set of eyes review your business growth goals. The more your banker understands your business and your plans for growth, the more likely you are to end up with the right type of financing to get you there.
Related blog posts