Lines of credit: A handy, flexible tool for small business owners

Lines of credit can be very useful for small businesses in a variety of ways. Whether you need a small investment to get your business off the ground, a little extra funding to get through a slow or inconsistent period, or a means by which your business can start building a banking relationship, lines of credit can give your business a boost when you need it. Still, they’re often either used incorrectly or not used at all. So what are lines of credit, and how can you use them appropriately for your business?

What is a line of credit?

A line of credit is a revolving loan that works similarly to a credit card for your business — once approved, you will have a predetermined credit limit that you can withdraw funds from at any time, and you’re only required to make payments based on the total amount of funds you have withdrawn. This can provide an important safety net for your business, allowing you to pull money to cover short-term costs.

When a line of credit for your business can come in handy

Lines of credit are particularly good at offering businesses flexibility with smaller, short-term bursts of funding. See below a few examples of when you’d want to use a line of credit.

• When your business has an emergency expense: If unforeseen expenses arise and you need funds quickly, a line of credit could be your best friend. You’ll be able to withdraw however much you need (up to your predetermined limit) to get some relief in a difficult situation.
• When your business is going through a slow or inconsistent period: We know that ups and downs are part of owning a business. Lines of credit can help stabilize your income, helping you out when things are slow via funds that can be paid back once business picks up again.
• Making smaller investments: Sometimes, you just need a little push financially to see increased growth for your business. Whether it’s a new tool, program, or service, lines of credit allow you to invest in yourself and your business.
• To fill in the gaps: You’re required to pay for supplies to make money, but your products and services won’t be paid for right away. A line of credit can provide funding for those times when you’re waiting to get paid by your customers. Or if your business is one that requires billing, a line of credit can help cover you until your Accounts Receivable are paid.

Best practices for lines of credit

Just like with a credit card, if lines of credit are used improperly, they can start working against your business, swirling up a spiral of debt. Here are a few tips to stay on top of your line of credit and avoid hefty expenses:

• Only use it for short-term purchases. For larger, more predictable long-term investments such as purchasing equipment or building a new location for your business, it may be a better option to get a single lump sum of money through a term loan instead.
• Use it sparingly. If you start treating your line of credit as an extra cash flow, you may have trouble paying it off during dry months for your business.
• Don’t make a habit of paying late. Just like with a credit card, it’s key to pay your bills on time to avoid late fees.
• Don’t lose track of your payments. Make sure you know exactly what is due when, and have a plan ready to source the necessary income.
• Set parameters and stick to them. If you need funding until money comes in, be sure to apply that incoming money to your principal balance to keep the line of credit paid down and available to use.

How to get a line of credit

If you’re considering applying for a line of credit, a good place to start might be to assess your own creditworthiness. You’ll likely want to know your personal and business credit scores, and get a free credit report if you haven’t already. These steps aren’t required, but it’s nice to have an idea of what you might qualify for should you decide to apply. And remember, even if you have less-than-ideal credit (or no credit at all), it still may be possible to receive a line of credit; meet with your banker to go over your options, as well as any steps you can take to improve your creditworthiness.

Before you apply, you’ll want to prepare any recent financial documents from your business, making sure your debts are minimal and your business is profitable. You may also need other forms of documentation, which your banker can explain. (We also recommend checking out our handy Business Loan Checklist, which you can download for free!) Once you have that ready to go, there’s just one last thing you’ll need to remember: Make sure you’re able to specifically explain how you plan to use the credit once you have it.

Once you have everything fully prepared, reach out to UBT’s Small Business team to look at line of credit options for your business. To read more online about UBT’s small business financing options, click here.