What to Consider Before Applying for Another Line of Credit
Are you thinking about applying for another line of credit? Here are seven things you should consider before making your decision.
1. What is the return on investment?
Before you take on additional debt, the best thing to do is to ensure that taking on debt will result in a return on investment.
The investment should return much more than the cost of the loan to be worth the risk. If you need help calculating your ROI, check out this post by Inc.
Ultimately, you’ll need to decide that your need for financing is crucial. Otherwise, you could be wasting valuable resources.
2. Does your business really need the financing?
Before applying for another line of credit, consider your business’s current financial needs. Is there anything you can’t afford? For instance, are you awaiting customer payments, and don’t have enough money to make rent? Or, consider what will happen if equipment breaks, and you need to get it fixed immediately. In these types of situations, a line of credit could help you afford necessary costs that are pivotal to running your business.
In comparison, if your business is earning enough sales and you’re in a comfortable position, you might not need a line of credit. Applying for another line of credit might be unnecessary, and could drain your finances.
Before applying, consider your financial situation, and see if you need the assistance.
3. Do you have a definite paycheck?
If you’re going to take on financial risk, you should have a way to reduce that risk in your business plan. Cutting out unnecessary costs so that you can repay your debt is helpful, but ultimately you need to make sure that you’re going to be receiving payments. If your business is going through a slow season and you don’t have enough money to repay debt, you could hurt your business in the long-run.
4. What’s the worst that can happen?
If, for some reason, your investment with the loaned capital fails, can you repay the debt anyways? Will your business default? If the answer is no, you might want to think twice before taking out another line of credit.
5. Will you have to personally guarantee the loan?
In some circumstances, you might be asked to personally guarantee a loan. If this is the case, your confidence in return needs to be much higher because the limited liability of your business can no longer protect you from the bank freezing your personal assets. Therefore, you should determine if you’ll need to provide collateral, and if you can afford that risk.
6. Your level of discipline
Some people receive a line of credit and pay it off very quickly, or only use exactly what they need. Others forget that they’ve acquired debt, and take a long time to pay it off, racking up an enormous amount of interest. To avoid any of these mistakes, ensure that you’re prepared to be responsible with a line of credit.
7. Were you able to fully repay your debt last time?
History is the best teacher and can predict your future habits. Consider how helpful your line of credit was last time, and reflect on how the repayment process went. To start, you should be able to answer these questions:
- How long did it take you to repay your last line or credit?
- How much did you pay in interest?
- Can your business handle the monthly payments?
By answering these questions, you can decide if you can afford a line of credit, or if it’ll cause unneeded stress.
Lines of credit boast flexible repayment options and can help you improve your business operations. In addition, they allow you to pay for unexpected expenses, build your business’s credit, and reach your short-term goals. Still, they aren’t right for every business, so make sure they are the right financing option prior to applying for another one!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.