A line of credit for your small business gives you the ability to respond quickly to day-to-day business needs, whether it’s an emergency or an unanticipated opportunity..
If a piece of equipment breaks down or you suddenly need to fill a bigger-than-expected order from a customer, a line of credit allows you to respond quickly without causing major disruptions to your operations. No need to scramble for more or new financing. .You can stay focused on running your business and stay afloat when unforeseen events hit.
There are ways to make the most of a business line of credit. Here are some tips
1. Keep your account up-to-date
Perhaps the number one advantage of business credit line is flexibility. You could even choose to not withdraw anything for extended periods.
But with most financing companies, it’s also smart to maintain your account up-to-date. It’s not unusual for a business owner to sign up, draw and then repay funds on a credit line and do nothing for a few weeks or maybe a couple of months.
But if you don’t use a credit line for longer periods, say, a year, and you haven’t updated your account information, the lender may have to again ask you to submit updated information about your business.
That’s because the state of your business may have changed. These could be positive changes that could actually lead to an increase in your credit line. But, of course, there could also be negative trends.
It’s important that the account is active. You can take a draw and let it ride out the six months on weekly installments. If you haven’t been updating your account, your lending partner will likely need to reassess your business before extending a new credit line mainly because the financing you’re getting is tied to your cashflow.
You shouldn’t withdraw funds if you don’t really need to. But one thing to keep in mind: utilizing your credit line regularly may improve your ability to get a credit line increase in the future.
In fact, consistent funding history builds more history allowing underwriters to potentially auto-approve funding requests and increase credit lines.
2. Provide a bank connection
One of the best ways to give a lender an up-to-date view of your business finances is to provide a connection to your bank account.
This allows lenders to view your bank data, and potentially even provide an increase when they see increased financial strength in your business. With such visibility, your account would remain active, and you might even be able to draw the funds you need without having to submit new information.
3. Watch out for liens
A lien is is a legal claim on your business or property placed by a lender as a form of security for lending you money. A lien would be the tool used by a lender to make the security interest public. A “security interest” is defined as “an interest in personal property or fixtures which secures payment or performance of an obligation.”
This is common practice in financing arrangements.
But liens could have implications on your ability to get financing to run your business.
For one thing, a lien on your business could mean a cap on the business line of credit a lender is willing to offer. For example, instead of a $50,000 credit line, a lender may decide to offer only $20,000 because of another financing firm’s lien on the business.
Here’s a key point to remember: sometimes business owners aren’t even aware of the liens placed on their business or property. I’ve come across business owners with liens from lenders they have never funded with, and even from lenders who are now out of business. The Uniform Commercial Code (UCC) requires a lender to have authorization from their customer prior to filing the lien. Generally speaking, the customer provides this authorization in financing agreement contracts signed prior to funding.
It pays to be a savvy business borrower. You should check with a lender and ask at what point they’ll file a lien, and if they will provide funding once they’ve filed, or if they will require confirmation from the Secretary of State. Each lien filing must be filed in the borrower’s state of incorporation and every state’s Secretary of State is set up differently, which can impact the time it takes to process the lien filing.
When you end a relationship with a lender, you should always make sure they terminate their lien. It’s also a good practice to ask for a copy of the lien termination, a UCC3, for your own records.
4. Watch out for ‘negative bank events’
“Non-sufficient funds” or NSF or “overdraft” are some of the bank account notices that are referred to as “negative bank events.” You should try your best to avoid them because these could have an impact on the type of financing you could have access to.
On the other hand, a healthy bank account is usually a positive sign for a lender.
Remember it’s not always about the amount of money you have in your account or the strength of your sales, it’s how you manage your money.
Clients who might not have the strongest sales or income may be able to demonstrate through bank data that they are able to manage their finances very well. They generally don’t have overdraft or NSF notices. Every month, they end on a relatively high balance for their income. That’s something that reflects positively on their business and ability to manage their finances.
A credit line gives you the flexibility to deal with unexpected twists and turns in running your business. Managing your finances wisely, while keeping your credit line account information updated, is the best way to maximize this type of financing.
This article was first published on January 19, 2017. It was updated on August 29, 2018.
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