A business line (LOC) is a useful alternative to business term loans as you can access your credit line whenever you need it. Since most locks are revolving type credits, lenders can borrow up to the preset limit, pay off the loan and refinance the money.
The credit line is also very popular. According to the Federal Reserve Bank’s 2024 SME credit survey, 40% of SMEs applied for the business line, the highest rate for any credit type.
To maximize the benefits of a business credit line, you need to be strategic about withdrawals and explain the associated fees. Without understanding your interest rates and payment schedules, you can hurt your finances by assuming too many debts. Additionally, if you realize you are not responsibly processing your credit line, you could endanger your future relationship with your lender.
Learn how to effectively use your business line of credit to make essential business purchases and allow you to reuse your credit line in the future.
Managing your business line is important
When using your credit line properly and paying off your debt in full, the business line can be a great tool for businesses. It can boost your credit score as the lender reports your timely payment to the Business Credit Bureau.
However, misunderstanding your credit line and undertake more debts than your business can handle can damage your credit. You may even enter a debt cycle that is difficult to get out of. Failure to repay can result in default or even business bankruptcy. To avoid these scenarios, you should understand the full cost of the loan before withdrawing so that you can repay it.
5 Tips for Managing Credits for Your Business Line
Managing a small business’s credit line starts with understanding the costs and whether you can afford to take them anytime. Second, you need to make a timely payment. Dive into each area and manage your credit line well.
1. Be strategic about withdrawal
Credit business lines differ from term loans as they do not receive one-time cash. Instead, most credit lines are reusable credits and can be used repeatedly if necessary. It works like a business credit card. You will need to pay interest on the borrowed funds. Once you repay your balance, you can borrow that amount again.
Business lines can be used to boost cash flow late. For example, if your business is seasonal, you can use LOC to pay operating costs such as inventory, while still lacking cash from unpaid invoices. A credit line also acts as a short-term loan, helping you pay small costs that you know will pay off quickly.
However, you should not use a credit line if you can make small purchases with cash or reposition your budget to find more capital. Rather than undertaking debt, we recommend looking for efficiency and reducing spending.
2. I’ll explain the price
You don’t need to pay interest on the business credit line until you spend your money, but you may need to pay the fee. A typical line of credit fees includes:
- Origination fee: One-time fees charged when opening a small business credit line
- Maintenance fee: Monthly or annual fees for holding an account
- Inactive fee: Fees charged when you do not raise funds from your account
- Lottery fee: Fees charged when you spend money from your account
- Renewal Fee: Fees charged if you renew your loc during the additional draw period
3. Understand the cost of a loan before withdrawing funds
Usually, once you subtract funds, you start to gain interest in LOC. To help you manage your payments, you can know the interest rate and the amount of interest you will have when you decide to withdraw funds and the amount of total repayments.
Let’s say you’re using $10,000 from your business credit line. The interest rate is 10%. If you want to repay your balance in one year, you will need to make a monthly payment of around $880. In total, the interest will be paid around $550.
You can use a business loan calculator to understand costs based on your repayment schedule. The breakdown of total borrowing costs in this example assumes a 12-month repayment period.
- $879.16 x 12 months = $10,549.91
- $10,549.92 (total loan cost) – $10,000 (original loan amount) = $549.91
4. Pay on time
To avoid late payment fees, making payments on time is essential for any business loan. You can set up an automatic withdrawal from your business checking account to ensure that all payments are made on time without remembering the due date.
If you want to save money with interest, you can also make additional payments to pay back your balance. When you repay your balance, interest is calculated at the new lower principal. This leads to lower interest over time, but normal payments remain the same.
Alternatively, you could opt to swallow additional interest payments to keep your business more cash flow. If you have an unusually successful month, you can decide to save money with business emergency funds that you can use to make loan payments in the future. Use your knowledge of your business’ cash flow patterns to set your strategy.
5. Ask to increase your business line (if that makes sense)
Another way to potentially increase your credit score is to seek an increase in your credit line after your account has been open for at least several months.
Although the limits are greater, if you maintain the same spending habits, your credit usage will decrease. Also, lower proportions can lead to higher credit scores. A higher credit score may require refinance to take advantage of the lower interest rate, but it can help you qualify for a lower interest rate.
Seeking an increase in credit lines is not necessarily a good idea. If you have recently made late payments on your account, it doesn’t make sense to increase your credit line. It’s unlikely that lenders would say yes.
If you don’t use your business line credits
If you are constantly losing money in operating expenses, using a credit line may not be the best option. Continuous losses indicate that there are greater issues than business loans can be rectified. If you have a leaky ship, it is better to patch the leak than maintaining relief. In this case, if you are using a business line, you can finally enter a debt cycle that you cannot pay back.
To support business cash flow, you can start by looking closely at your business budget and finding where you can adjust your costs. You may also want to consider refinancing your existing debts into a loan with a longer repayment period or a lower interest rate. If you have multiple loans, consider consolidating your loans with one loan, preferably at a low interest rate. These strategies should provide debt relief.
Consider talking to current lenders about these options, or comparing other small business lenders to find the best loan.
Conclusion
Using business line credits can support a strong financial situation for your company, but that can hurt too. Before you withdraw your money, plan to manage your credit line and understand how your payments and fees fit into your current budget. Next, you will build a positive payment history that will help you pay on time and qualify for better terms and interest rates in the future.
