For most business owners, business lines of credit are indispensable tools to achieving their entrepreneurial dreams. Like a mix between a small business loan and a credit card, a line of credit offers a large limit from which you can draw, but you only pay interest on the money you use. This comes in handy when your cash flow is shaky, when you have a surprise expense, or when you need to buy more inventory because your business is booming.
However, like small business loans and credit cards, you shouldn’t rush the process of acquiring a line of credit. In fact, there are plenty of major mistakes you can make if you don’t carefully consider what your business needs from its line of credit — mistakes such as:
Misunderstanding why you need a loc
It’s always nice to have some extra cash on hand, but a line of credit is not that. A line of credit is a financial tool that should fit perfectly into your long-term business plan.
For example, if you expect your business to develop seasonal customer patterns, you might use a line of credit to pay the bills during your off-period. If you plan to expand your business with new products or locations, you might need a line of credit to pay for extra inventory or utilities until revenues increase. There are plenty of good reasons to acquire a business credit line — you just need one, and you need to recognize it well before you need the money.
Waiting until you need a loc to apply for one
This is the most common mistake associated with applying for business credit lines. Because applications take time, business leaders tend to procrastinate, believing rightly that they don’t need the money immediately. Unfortunately, when they do need the money, it’s too late to apply.
Line of credit lenders consider a number of factors when determining whether to accept businesses and how much to offer. However, positive cash flow is among the most important attributes. When a business needs a line of credit, its cash flow is typically stagnant or negative, which makes that business too risky for most lenders. It’s much smarter to apply for a line of credit when you don’t need it, but you should expect to need it sometime soon.
Rushing an application
If you were applying to graduate schools, you wouldn’t rush your application to a prestigious MBA program; if you were still on the job market, you wouldn’t rush your application to the perfect job. Similarly, you should take your time and carefully submit your line of credit application.
As a business leader, you are busy, but you shouldn’t be too busy to risk mistakes and discrepancies on your business credit line application. As soon as lenders discern a pattern of sloppy work, they will be less inclined to offer you the money you need. It is far safer to be exacting in your application and triple-check the information you provide, even if it takes time to do it.
Lying on your application
According to the Motley Fool, half of all businesses fail after five years; if you ask Bloomberg, those numbers shift to about 80 percent and 18 months. While the exact numbers aren’t certain, it seems obvious that it is entirely possible that your business can crash and burn in a relatively short period. Unfortunately, this leads entrepreneurs to act desperately, doing everything and anything to keep their dying business alive.
If your business is on the strung, you should resist the urge to lie on your line of credit application. You will be found out; there are extensive checks worked into the application acceptance process to weed out liars and cheaters. Plus, you could seriously jeopardize your hopes of getting any financing in the future. The integrity of your business (and your name as an entrepreneur) should always be your first priority.
Misusing your loc once you have it
Unlike credit cards, lines of credit typically have specific purposes which are outlined by the lender. For example, if you attain a seasonal line, you can only use it to supplement your off-season accounts receivable and inventory; you cannot use it to finance building a new location. Typically, lines of credit reimburse you after you make an acceptable purchase, so there is no fooling a lender into paying for expenses they did not agree to. If you decide you need a line of credit to cover expenses besides those outlined in your contract, you can apply for a separate line.
