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How To Manage a Business Line of Credit Responsibly

Business Bills

Having access to a business line of credit can be a lifeline when cash flows are interrupted.

Unlike term loans, where a lump sum is provided and then repaid over time in set installments, a line of credit allows businesses to borrow and repay funds whenever needed, up to the approved credit limit.

Managing a line of credit is essential, as mismanagement can quickly lead your business into trouble and permanent debt. Here are some tips for managing it properly so you can ensure that it works to your benefit:

Know The Terms & Conditions

When signing up for a business line of credit, you must familiarize yourself with the fine print associated with the credit line. This includes being well aware of the applied interest rate and any additional fees and repayment terms. Failure to understand this can lead to nasty surprises down the line. This is entirely avoidable by ensuring that you are well informed.

Be Strategic

Strategic use of your line of credit is critical so that it does not become a crutch used uncontrolled. This means having a well-defined budget and plan for how the funds will be used and how they will be repaid. Borrowing more than necessary can lead to trouble, which should be avoided. The general rule of thumb is only to borrow what you need when needed.

Keep an Eye on Your Cash

Monitoring your cash flow is a critical part of running a business. Even though your line of credit might help you stabilize that cash flow, always ensure you have enough cash to make timely repayments. Relying solely on your line of credit to cover ongoing operating expenses is not advised.

Maintain an Emergency Fund

Many business owners view their line of credit as their financial safety net. However, there should still be an additional emergency fund on hand, which could help you cover unexpected expenses without necessarily relying on credit alone. This can help you avoid deeper financial difficulty and prevent your line of credit from becoming a crutch.

Build Your Credit History

Building and maintaining a good credit history can improve your interest rates and secure more favourable terms for your line of credit. Doing this can be achieved by making timely payments on all your financial obligations, including your line of credit, as this will help you build a more positive credit profile and improve your attractiveness as a borrower.

Always Communicate with the Lender

Encountering financial challenges can sometimes be unavoidable. Suppose you find yourself in a situation where your line of credit cannot be properly repaid due to a financial setback. In that case, it is essential to communicate with your lender immediately. This way, your lender can work with you to find a solution, which might include adjusting repayment terms or providing temporary relief so that you can get your finances back on track.

Here at Rapid Finance, we provide a range of business financing mechanisms, including business lines of credit. Contact us today to find out what we offer and how you can apply.