Unarguably, a business line of credit can be instrumental in maintaining a steady cash flow in business, leading to its growth and prosperity. However, harnessing its optimal benefits, needs an in-depth understanding of its terms, using cash flow management prudently, and repaying on time, says Charles Spinelli. In this article, Spinelli attempts to speak on the secret strategies to acquire the full potential of this financial tool efficiently. To explore, keep reading
- Understanding the Credit Terms
Before availing a business LOC, it’s essential to understand its loan-associated terms thoroughly. This involves knowing the credit limit, rate of interest whether fixed or variable, terms of repayment, and allied fees if anything is chargeable. Also, make sure to know how the interest rate will be calculated and if the lender charges extra for prepayment or early paying off.
- Consider it for Effective Cash Flow
One of the leading advantages of a business line of credit lies in its flexibility in proper management of cash flow. Make sure to opt for it to meet gapping of short-term cash flow, for instance dealing with seasonal sales upsurge, paying for inventory, and under the circumstances when it is most wanted. As opting for the funding option during slow periods helps in sustaining the cash flow, ensuring repaying the dues when revenue is considerable indicates the sensibility of a businessperson as it comes in handy to maintain operational permanence and dodge business disruptions.
- Borrow Only What Is Needed
According to Charles Spinelli, to keep the interest rate as low as possible, businesses should borrow only that much funds – required from LOC. Given that, the interest of LOC is charged only the amount drawn, using it wisely can help in saving expenses on paying interest. It makes sense to avoid seeking LOC for long-term investments which could be opted for through traditional business loans.
- Review and Stick to Credit Utilization Ratio
To track and stick to credit utilization ratios, reviewing the LOC statements from time to time is vital. It is wise to keep the credit utilization ratio within 30% and never go beyond 50% as it may inversely on the business as well as lower the credit score of the business. This needs reviewing the credit score as it can help in managing debt levels and staying away from going beyond one’s limit.
- Repay On Time
Repaying borrowed funds on time is crucial to maintaining a hearty credit profile and also ensuring that the funding option will remain available whenever in need. Keep a target to pay off the installments within the due date and avoid paying penalty on interest. Apart from keeping the interest rate lower, it helps build the credit score and the likelihood of increasing the credit limit. Timely or even prompt repayment of dues also helps in getting more relaxed terms over time.
- Use for Growth Opportunities
It is always prudent to go for LOC for capitalizing growth opportunities, such as acquiring new equipment, investing in prospective projects, and expansion of business, adding new products demanding in the market, etc. Given the LOC comes as a flexible source of funding, it is the best choice to grab its opportunities that can drive business growth and profitability.
Although LOC is a great financial tool, it’s important not to depend on it excessively. Over-dependence on borrowed funds can result in a cycle of debt making it a financial strain on business. So, make sure to use it strategically, by following the above guidance to manage debt and retain solid financial health.
