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Business Lines Of Credit And How To Use Them
Okay so you've managed to land that much coveted credit line from your bank. But now you want to make sure you use it wisely. And that's what many people don't know how to do. They don't know how to use a bank credit line properly so that the bank will want to renew it and increase the funds available with it. A bank line of credit can be an enormous asset if used correctly.
Banks today are being pretty tight fisted with their money especially when it comes to small businesses. I recently talked to a friend of mine who is a Vice President at Bank of Nevada in Las Vegas. The topic of the current credit situation came up and I asked him how tight the lending was. He said to me the only thing that the banks really care about now is your Fico score. Even your company financials are secondary to your score. He then mentioned to me that the same principles are applying to renewals that they apply to new applications. But some old strategies can help you get your credit line renewed.
So what does your bank want to see you doing? Well for starters they want to see you using your credit line. The purpose of a bank line of credit is to cover cash shortfalls for small amounts of time. A bill needs to be paid but your customer hasn’t yet paid you. You draw on the line and borrow the money you need to pay the bill. Once you have received your payment then you pay the money back to the bank. Over the life of the credit line you repeat this process continuously. Borrow and repay is what they want to see.
Now you need to remember the golden rule about asking for money. Ask when you don’t need it. Then when you do need it you already have it. Credit lines are meant to give you short term flexibility. They should be used for ongoing cash generating operations. They should not be used for projects that may or may not see a return in the future. Nor should you stretch your budget for projects that are based on future returns thinking that you can use your credit line to cover expenses.
That is a mistake many small businesses make. Say that a piece of equipment is found that they could use. Now they’ve done just fine without this piece of equipment in the past but for whatever reason they just have to have it. Maybe it is thought that the equipment can improve productivity or their is more use for it than there actually is. But they don’t have enough money set aside to buy it and they can’t finance it. So they use money from there credit line to buy it.
Well now we have a problem. If your company didn’t have the money to buy the equipment outright without help how then are you supposed to pay the credit line back down. You see one of the most important things the bank wants to see is that you can pay the balance down to zero. They want to know you have the ability to pay them back. And by borrowing often and then paying the line back down to zero the better you will look.
Now let’s look at the other end of the spectrum. Your company has plenty of money and doesn’t need to use the line. Use it anyway. You never know when your situation might change and if you show your bank you don’t actually need the line they may not be inclined to renew it when it comes time. Remember they’re in business to make money too and they only do that on money you’ve actually borrowed not on the fact you have a credit line.
Credit lines can be of great help or cause major problems. So don’t treat it like you’ve just won a shopping spree because you have to pay it back.