The Proper Way to Use a Revolving Credit Line

How to Properly Use Your Business Line of Credit

One of the most valuable tools a growing business can have is a revolving line of credit issued by your bank. But it is a tool that must be used wisely or you could lose it. So what exactly is a revolving line of credit? First off it is not a credit card. You are not issued a piece of plastic that can be whipped out whenever you need something. Instead it is a line of credit issued by a bank which is intended to cover the short term cash requirements of a business. It is normally used to cover the gap that occasionally occurs between receiving payment from a customer and making payment to a vendor. It is usually good for a period of one year but can be renewed at the end of each year.

How Does Your Bank Make Money?

So how does your bank make money off you? Well besides the fees they charge for establishing the credit line they make money on the interest. But just like a credit card they only charge interest on the money currently being borrowed. Not on the amount available to you.

Why You Need to Manage Your Line Carefully

Now just as you have to manage other aspects of your business a credit line must also be managed. The better you manage your credit line the more likely it will be that your bank will renew it. Along with your bank renewing your line of credit the possibility exists that they may increase the amount of the line if you ask and can prove to the bank the benefits of doing so.

What Is Your Bank Looking for?

So what exactly does your bank want to see? They want to see you use it properly of course. To them this means borrowing and repaying it regularly. A bank credit line is not a long term loan. You want to borrow what you need from it to pay particular bills and when your customer has made their payment to you then what you borrowed needs to be repaid. The more times this occurs the better the bank will like what you are doing.

Use Your Credit Line During Good Times as Well as Bad

Even if times are good and you don’t need to borrow money from it you should. By keeping the account active you show your bank that you value the line of credit you have and would like to keep it. If times become somewhat tight and you need to borrow regularly from it remember one rule above all concerning a credit line. Show the bank you can pay it off even if you have to borrow again the next day. Your banker will sleep better at night knowing the line of credit they issued is in good hands.

By Cash Justin Miller