In our four-part series on getting a business line of credit, we’ve discussed evaluating your deal and acquiring capital. In the previous post, we discussed best practices for utilizing your Unsecured Business Line. Now we’ve arrived at the final step in the process: Managing your UBL.
Some people will tell you that you’ve made it and now you’re home free. I would agree that after you have obtained your approvals, you’ve accomplished your goal. But there are some very important keys to proper management of your business lines of credit.
Let’s start by discussing traditional business lines. These are unsecured lines of credit that are not tied to a credit card. This advice is meant specifically for the management of unsecured business lines. Unsecured lines pose a greater risk to a bank, so you will play by some different rules when managing an unsecured line than you will when managing a business line that’s secured by collateral.
Remember that business lines of credit are intended to be used for short-term borrowing needs. A business line isn’t really intended for long-term borrowing. You shouldn’t be using it as a down payment on your dream home or to buy that new S-Class Mercedes. For longer term purposes, you should be looking at a different type of financing normally, an installment-loan product.
One of your goals in managing your UBL is to avoid the lender’s attention. In other words, you don’t want your account activity or your account history to cause the lender to review your account and begin asking questions. You don’t want them to seek additional answers or documentation from you.
Most lenders who issue these unsecured lines of credit will open a business checking account — also known as a deposit account — that is attached to your business credit line. Although each institution manages its portfolio differently, there are two main rules to follow if you wish to keep your UBL open and active:
- – Never pay this account late. Not even one day late. If you wish to maintain and preserve this account, then don’t give the lender a reason to close it or review your account. If you pay them late, it could work against you. I’m not saying that if you do this then the lender will never take any adverse action against you, but I am saying you don’t want to give them any ammunition. Don’t pay late. Period.
- – Don’t let your deposit account get overdrawn. Keep it funded. It’s probably not a great idea to keep $100 in this account, but whatever you do, don’t become overdrawn. Yes, sometimes the business line serves as overdraft protection. In those situations it’s usually not a big deal, but I still recommend very close, vigilant management of the deposit account. Zero overdrafts is better than one overdraft, so avoid it if at all possible.
These are the two main factors that cause lenders to review your file. If a review is done, it’s more likely your credit will be checked, questions will be asked, and possibly the lender will request documentation from you. Avoid that if possible.
Next let’s talk about the management of the UBLs that come in the form of business credit cards. After those UBLs are properly utilized and you borrow from them, it’s wise to set up each and every business card for autopay of the minimum monthly payment from one of your accounts.
Another UBL management tip: Let’s say you have $100,000 in business credit cards and you want to access those funds. We always suggest that you set aside $20,000 – $30,000, and then only use the balance of those funds. In other words, if you only use $70,000, then you’ll have $30,000 set aside. That $30,000 could cover your monthly payments for over a year. If you do this then your UBL payments will have zero impact on your budget.
This strategy is especially good when you have the 0% introductory offers that most of our clients receive. If that?s the case, then you not only protect your budget, but you’ll have little to no cost for doing it this way.
Right now, in summer 2010, we’re in a credit environment where lenders are actually more likely to cut credit lines than they are to increase them. That does not mean that you cannot get your credit lines increased — it’s simply that you want to make well-informed decisions with the best possible chance of getting your desired outcome. We see more success in opening new business credit lines than we’re seeing in the increase of existing credit lines.
The other aspect of UBL management involves interest rates. Rates on business cards obviously fluctuate up and down based on a few different factors. As long as you’re making your payments on time, not going over your credit limits, and managing your account properly, you should be able to maintain good interest rates on your UBL. At either six months or one year intervals, it’s a good strategy to ask the lender for either a credit line increase or a lower your rate. You won’t normally get these if you don’t ask. Nowadays, I think it’s best to ask for a lower rate rather than a credit-line increase.
If you found this series on getting unsecured business lines of credit helpful, or if you still have questions, please feel free to get in touch with me. At LenCred, we’re here to give you honest and dependable answers about your business financing needs.
My best to each of you who are starting, building, or growing your businesses.