You may know that you can get a credit line for your company, but when is this a good idea? We will be discussing some scenarios where a business line of credit is a good idea and some where it is not in today’s article.
If your company has a large collection of outgoing and incoming payments that tend to overlap a great deal, you may benefit from a business line of credit. The reason for this is that you have large fluctuations in your cash flow it can help to smooth out those fluctuations if you can run your normal operating expenses through a line of credit. There are some exceptions to this rule however. If your outgoing expenses are outpacing your incoming receipts over an extended period of time, not just within a month, you should isolate and fix this problem, do not let your credit line grow out of control. Furthermore, you should only use this technique if you are able to pay the balance in full within the grace period to avoid interest. Also, you should keep some fund available in your credit line to deal with emergencies; this will be much more cost effective than dealing with emergencies with emergency loans, at high interest.
When should you avoid a line of credit? Never obtain a line of credit to deal with an ongoing lack of profitability. If you aren’t profitable you need to fix that problem, borrowing more money is will not resolve anything and will only make your financial situation worse. Also, you never want to use a line of credit for anything that will take more than 90 days to pay off, a business loan would be more appropriate for anything that long or longer as they tend to have lower interest and are more appropriate for long term debt. Think of your credit line as a way of rolling money between available cash on hand and money you don’t quite have yet, but will have soon. If you need to make a major purchase, use a loan, if you need emergency funds you should perhaps try a cash advance as they have very fast approval. This of course assumes that you don’t already have a credit line to cover emergencies.
This is just a basic outline of how and when to use your business line of credit. You should use your own judgment when deciding how to deal with each specific issue on a case by case basis.