A line of credit is essential for small business owners because it increases their purchasing power. However, it can easily be abused and lead to bankruptcy. Learn how you can manage your line of credit wisely.

How a line of credit works

A line of credit is an open-ended, flexible loan where you can borrow funds in the future up to a certain credit limit.  It works like a credit card and it is convenient because you can use it as needed and pay it off when you already have the funds. However, this flexibility in terms of purchase and payment makes it one of the most abused financial vehicles. So, if you keep on assuming debts while ignoring the need to alter your spending habits and to create a budget you might be placing yourself in a long-term financial predicament.

1) Choose your line of credit wisely

Do you want to have a pool of available cash that you can borrow from, anytime? A line of credit gives you the ability to spend money – and you only have to pay interest when you dip into the funds.

There are several types of line of credit:

  • Home equity line of credit: Your home equity is the collateral of your debt
  • Credit card-You can borrow up to the maximum limits, and repay and re-borrow several times.
  • Overdraft line of credit-When you spend more than your available limit in your checking account it will be regarded as a small loan.

2) Check your line of credit accounts

Login to your accounts or visit your bank to check changes in interest rates, cuts on credit limits, and notices of delayed payments. Look for online or paper statements because you might have notices of you have been charged penalties. If there are some discrepancies, you can contact the customer service or visit the bank.

3) Don’t max out your credit limits

Maxing out your limits can harm not only your credit score but your business as well. Avoid paying higher interest and higher insurance premiums, by keeping your expenses below 30% of your available credit at any time on your accounts. Always pay your balances in full each month stop adding unnecessary purchases. It is also important to pay your balances on or before the due date, to avoid late fees.

4) Don’t acquire more credit card accounts

Work on improving and building your credit score by maintaining a line of credit you pay on time and maintaining a maximum of 3 credit cards. Don’t be lured by special discounts and offers unless there is a huge benefit that would offset the horrendous interest rates (which rarely happens).

5) Before you apply for a line of credit read all of the terms and conditions

Make sure that you only use up to what you can normally pay for, especially when your business is not doing well. It is not good to carry credit card balance each month. Don’t be saddled with seemingly endless business line of credit.

If you need some advice on line of credit and business loans, ALC Commercial is here to help you. We offer the most suitable line of credit and other types of loan products to cater to your business and individual needs.