Small business credit line approval: how to use your line of credit to solve poor cash flow

So you’re approved or want to apply for a business line of credit. Is it a good idea for your business cash flow?

Many small businesses dealing with poor cash flow or high payroll consider applying for a business credit line.

Here’s some information to help guide you about whether a business credit line is a good idea for your business.

What you’ll learn in this article:

• Will taking a business line of credit help or hurt my cash flow management long-term?
• When you should AND shouldn’t open a business line of credit
• How to determine which products and services aren’t worth a credit line
• How to use my line of credit to manage business cash flow better
• How much cash is right for your business – not to over or under borrow your credit line?

Should I apply for a business line of credit?

The first question to ask yourself before using a line of credit is this:
Will taking a business line of credit help or hurt my cash flow management & profitability long-term?

Yes, a business line of credit could cover the inevitable expenses, but you want to gear it towards opportunities and growth. Because if you’re getting a business line of credit to fund a loan, you’re only covering up one hole by making a new hole. It’s a never-ending story.

Here’s a chart of general guidelines to see whether to try for a secured OR unsecured line of credit for your business — will it help or hurt your business?

Simply keep in mind – ensuring and managing cash flow is a challenge.

Yes, bills must be paid. But expenses are gone after they’re paid — and don’t leave you with any benefit. Growth stays with you — and in the long-term, helps you solve your business cash flow challenges and become more profitable.

The last thing to cover debt with is more debt.

Tips on keeping more cash in the bank to prevent poor cash flow →

How do I determine if my business credit line is really for growth and will help my cash flow long-term?

It’s not always clear cut whether an expense will help you grow or take away from your revenue. This could make it hard to manage business cash flow with your new line of credit.

Before applying for a small business line of credit, or credit line loan alternatives, try this:

This surprisingly simple exercise should take less than an hour, but is critical — not just for small business cash flow management, but for your long-term profitability and growth. This is also an easy guidance system to highlight what your line of credit should reinforce in your cash flow.

Now, you’ll easily see the products that are adding value to your company (in the “generating” pile) and some products that are often surprisingly destroying value of your company (in the “negative” pile).

Don’t have clear books?
You can hire a low cost bookkeeper on Upwork who can crunch the numbers for you in a day or two.

Keep the products or services that are generating value and support those with the new business line of credit. Stop the products or services that are destroying value, since those expenses are being burnt and not staying with you.

This is just one of several powerful ways to evaluate where your cash is going, when analyzing your cash flow.

I opened a business credit line. How do I use my line of credit to manage cash flow better?

“Whatever the loan is, look at it as an investment. Only put it where it will bring in more money.”

So you pinpointed where your low cash flow is coming from. And you looked at your margins to determine that you can afford to take a loan or business line of credit. You know that a loan or line of credit is the best way forward.

At this point, it’s critical to look at the loan as an investment. As money pumped into the business to help it grow. I.e., one dollar invested in the loan will yield two dollars in return.

Ask yourself, “What will be the best use of those funds that can guarantee that I can get that money back to us — with interest?”

Read more about opportunity costs of low cash flow here  →

Approved for a business line of credit…
But, how do I avoid overborrowing my credit line? How much cash is right for my business?

The main benefit of a business line of credit is the flexibility. Unfortunately, that same flexibility could easily lead to overborrowing. And in the long run, that will hurt your business cash flow.

A smart way to approach this is to be very clear about how you’ll use the funds and repay them — before applying for a business line of credit.

In other words, ask yourself: “how much does the risk of borrowing money cost me?”
How much does it take away from my profit margins?

It’s always about balance.

Calculate the and only cover what will produce for you.
Why are financial ratio calculations so important?

• They show how healthy your company is — and pinpoint areas where profits can be improved
• You know when you’re getting your cash back after you “invest” in it today — and can manage cash flow in business more efficiently
• They make it easier for you get approved for a larger business credit line — because they help reassure banks that you properly plan your cash flow, and know where and how to use the funds.

Rule of thumb: Only borrow after calculating your working capital and assessing your business cash flow. Don’t borrow more.

Read more about tips to understand and drive positive cash flow for small business →

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