Credit lines
Right for your business recession plan?
More than 90% of small-business owners are worried about experiencing an economic recession over the next 12 months, according to a June 2022 Goldman Sachs survey.
One option to consider is applying for a business line of credit. Unlike a business loan, a line of credit lets you decide when and how much to withdraw, up to a set limit. 1 Would your business benefit from a line of credit? Since it’s common for access to financing to decrease during a recession, getting a line of credit before you need it can be a smart move.
For example, if you plan to invest a lot in inventory and materials or take on projects that require substantial outlays of cash before you receive payment from your customers, a line of credit can help ensure you have funds available in the future to do it.
A line of credit can also be used to cover operating expenses such as rent, wages, insurance and maintenance.
Lines of credit are generally a good option for businesses concerned about fluctuating needs for funds, according to Carolyn Katz, a mentor at the New York City chapter of SCORE, a nonprofit organization offering education and mentorship to small businesses.
2 Drawbacks to credit lines While a line of credit could be used as a reserve or emergency fund during challenging economic times, there are drawbacks to consider when getting one that may not be used.
It takes time to apply and complete the paperwork, the lender may charge a maintenance fee if you don’t use the line and your limit may be lower than you want. Also, because lenders look at credit lines, even unused ones, when evaluating a borrower, a line of credit could negatively affect your ability to get other types of financing.
3 What do you need to get a line of credit? If the credit line’s benefits outweigh the drawbacks and you decide to apply, lenders 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.
Also, keep in mind that older accounts receivable can be considered at risk of nonpayment. “If a line of credit is something that you’re going to be looking at, try to keep your receivables below 60 days,” Katz says.
This article was provided to The Associated Press by the personal finance website NerdWallet. Want to suggest a personal finance topic that Quick Fix can address? Email apmoney@ap.org