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According to a June 2022 Goldman Sachs survey, more than 90% of small-business owners are worried about facing an economic downturn in the next 12 months.
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As lenders tighten their lending standards during recessions, small business owners may look for ways to secure funds before access to credit diminishes.
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One option to consider is to apply for a business line of credit – even if you don’t need it right now. Unlike a business loan, a line of credit lets you decide when to withdraw money and how much, up to a set limit.
Will your business benefit from a credit line?
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Since it’s common to have decreased access to financing during a recession, getting a line of credit before you need it can be a smart move, especially if you see the potential for cash flow issues in the future.
For example, if you plan to make large investments in inventory and materials or take on projects that require substantial cash before receiving payment from your customers, a line of credit can help ensure that Maybe you have money available in the future to do this.
In addition, when your business experiences a short-term decrease in revenue, a line of credit can be used to cover operating expenses such as rent, wages, insurance and maintenance.
In general, lines of credit are a good option for businesses that are concerned about fluctuating needs for funding, according to Carolyn Katz, a patron of the New York City chapter of SCORE, a nonprofit organization that Provides education and advice to small businesses.
When you decide to apply for a line of credit, Katz says, “you should try to get whatever line is available,” because even if it doesn’t completely cover your costs, it may be worth less. Doing it and repaying it regularly will help you. Earn your way to a bigger line. ,
Are there drawbacks to having a credit line?
If fluctuations in cash flow are not a concern, your decision to apply for a line of credit is more complicated. While a line of credit can be used as a reserve or emergency fund during challenging economic times, there are drawbacks to consider not using it.
It takes time to apply and complete the required paperwork, the lender may charge a maintenance fee if you don’t use the line, and your limit may be lower than you’d like. In addition, because lenders view lines of credit, even unused ones, when appraising a borrower, a line of credit can negatively affect your ability to obtain other types of financing. Is.
What do you need to get a line of credit?
If the benefits of a line of credit outweigh the drawbacks of your business, and you decide to apply for one, the lender will typically review your business’s profitability, credit score, and accounts receivable. Accounts receivable, the money owed by customers for goods or services, represents future revenue that can be used to pay off your line of credit.
“Receivables are important for any type of loan product, but along the lines of credit, your accounts receivables are really the No. 1 criterion,” Katz says.
Also, keep in mind that old accounts receivable may be considered at risk of non-payment. “If credit is something you’re going to see, try to keep your receivables under 60 days,” says Katz.
When should you apply for a credit line?
Shauna Huntington from the NAWBO Institute of Entrepreneurial Development, a nonprofit education foundation of the National Association of Women Business Owners, says business owners who want a line of credit should consider getting one before they actually need it. needed.
“If they wait until they get that big order and they need credit to produce it, it’s going to be hard to go to the bank and ask for that money and turn it around quickly,” says Huntington. “
With the option to withdraw money as needed, a business line of credit may be the right move for businesses that are concerned about cash flow issues in the future. However, a line of credit, used solely to hedge your bets on an uncertain economy, can be an unnecessary expense that provides few, if any, benefits.
This article was written by NerdWallet and originally published by The Associated Press.
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