3 Reasons Why Having a Line of Credit is ImportantMay 25, 2022
Oftentimes business owners will ask me why I recommend getting a line of credit out when they have enough cash to pay their bills.
Here are 3 reasons I believe having a line of credit is so important to achieving your next level business goals
1. You have employees
If your business has a payroll and even if it’s just one employee it’s vital that you have access to a line of credit? Why? Well because you cannot not pay payroll.
Sometimes we can get into a crunch as a business owner with cash flow but it’s our responsibility to make sure that we don’t let that affect our employees and that we have a plan for these times. If we don’t pay our employees, they will likely leave and this is not what you want, especially if you’re hiring great people that you’re keen to develop.
So you should always have a line of credit if you have payroll, no exceptions.
2. To establish credit for your business through Dun & Bradstreet credit reporting agency
So just like with your personal credit, you need to you have a credit score, right? Dun and Bradstreet is a credit report agency for businesses, and as you grow it’s important that you have a good rating with them. This will help you establish better business credit for larger credit lines in the future. All companies need investment as they grow so keep this in mind if you want to take your business to 7 or 8 figures and beyond!
3. You’re able to have greater choice
Not only is having a line of credit about having money available to you if things get tight but if you need to purchase a large piece of equipment or invest in the business in some way then by having the credit available you have more choice.
Whether that’s offering a choice in the item of what you’re purchasing or being able to get a discount because you’re able to pay up front for the item/investment. And often the interest rate on your line of credit is lower than if you would finance it through personal financing, sometimes up to 20% lower than on your personal credit.
Let’s say you’re trying to build your business and suddenly your business explodes and you don’t have enough staff or equipment to handle it. Maybe you find yourself making do for the time being with the extra pressure because you don’t have the cash flow to invest in expansion and that’s actually hindering your growth even more. This is where having a line of credit helps because you can hire in advance of the big explosion and be prepared!
And the best time to get a line of credit is when you don't need it.
So when your business is doing really well, banks will give you more money, when you don't need it, rather than when you need it. I know it's crazy, but it's true. If you think about it, you're less of a risk if you're doing well.
So whether you have a line of credit, I always recommend if you had a really good year, increase that line of credit. And if you don't have a line of credit, and you had a really good year, go get a line of credit, even if you never use it, it's there. It's a business security blanket.
How much credit should I get?
This is another question that I get asked a lot and so what I typically recommend is a minimum three months of your payroll for your line of credit. Whether you have a bad couple of months or you suddenly have a lot of receivables, you want enough so you don’t have to worry about paying payroll.
If you're just starting out and you don't have payroll, but you still want to establish good credit then I recommend starting with $10,000 or $20,000. Your bank will also make recommendations for the level of credit for your business.
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