Credit lines and Flexible Financing

You just got a line of credit for your small business—great news! You now have an important financial tool to maintain your cash flow and ensure your daily operations run smoothly. 

A credit line allows your business to smooth cash flow and deal with unexpected expenses. Learn how to get the most out of this flexible financing tool.

A credit line gives you the ability to respond quickly to unexpected business needs. You can use it to fix a busted piece of equipment, fill a big order from a customer, or even reward your employees for their hard work.

Now that you have this financing available, you want to make the most of it. 

Watch Out for Liens

A lien is a legal claim on your business or property placed by a lender as a form of security for lending you money. A lien would be the tool used by a lender to make the security interest public.

This is a common practice in financing arrangements. But liens could have implications on your ability to get financing to run your business.

For one thing, a lien on your business could mean a cap on the business line of credit a lender is willing to offer. For example, instead of a $50,000 credit line, a lender may decide to offer only $20,000 because of another financing firm’s lien on the business.

Sometimes business owners aren’t aware of the liens placed on their business or property. The Uniform Commercial Code (UCC) requires a lender to have authorization from their customer prior to filing a lien. Generally speaking, the customer provides this authorization in financing agreement contracts signed prior to funding, but business owners may not notice or may not realize the implications of this authorization.

It pays to be a savvy business borrower. You should check with a lender and ask at what point they’ll file a lien, and if they will provide funding once they’ve filed, or if they will require confirmation from the Secretary of State. Each lien filing must be filed in the borrower’s state of incorporation and every state’s Secretary of State is set up differently, which can impact the time it takes to process the lien.

When you end a relationship with a lender, you should always make sure they terminate their lien. It’s also a good practice to ask for a copy of the lien termination, a UCC3, for your own records.

Keep Your Account Up-to-Date

Perhaps the number-one advantage of a business credit line is flexibility. You can use it when you need it, or not use it when you don’t. It’s not unusual for a business owner to sign up, withdraw and then repay funds on a credit line—and then do nothing for weeks or even months.

But it’s also smart to keep your account up-to-date. If you don’t use a credit line for longer periods—say, a year—and you haven’t updated your account information, your lender may ask you to submit updated information about your business.

That’s because the state of your business may have changed. These could be positive changes that could lead to an increase in your credit line. But, of course, there could also be negative trends.

That’s why it’s important to keep your account active. You shouldn’t withdraw funds if you don’t really need to, but keep in mind: Utilizing your credit line regularly may improve your ability to get a credit line increase in the future.

In fact, consistent funding activity builds more credit history, allowing underwriters to potentially auto-approve funding requests and increase credit lines.

Provide a Bank Connection

One of the best ways to give a lender an up-to-date view of your business finances is to provide a connection to your bank account.

This allows lenders to view your bank data, and potentially even provide an increase when they see improved financial strength in your business. With such visibility, your account would remain active, and you might even be able to draw the funds you need without having to submit new information.

Avoid Negative Bank Events

“Non-sufficient funds” (NSF) or “overdrafts” are some of the bank account notices that are referred to as “negative bank events.” You should try your best to avoid them because these could affect the type of financing you have access to.

On the other hand, a healthy bank account is usually a positive sign for a lender. Remember, it’s not always about the amount of money you have in your account or the strength of your sales, it’s how you manage your money.

Clients who might not have the strongest sales or income may be able to demonstrate through bank data that they are able to manage their finances very well. They generally don’t have overdraft or NSF notices. Every month, they end on a relatively high balance for their income. That’s something that reflects positively on their business and ability to manage their finances.

A credit line gives you the flexibility to deal with unexpected twists and turns in running your business. Managing your finances wisely, while keeping your credit line account information updated, is the best way to maximize this type of financing.

The good news for small business owners is that there are now many other financing options available.