Why It's Not a Good Idea to Max Out Your Business Line of Credit

Why It's Not a Good Idea to Max Out Your Business Line of Credit

Your business line of credit is a vital safety net. It provides you with the security you need to navigate the ups and downs of running a restaurant or retail establishment. However, although it offers you a pool of funds you can utilize for any number of reasons, don’t spend up to your limit without understanding the consequences.

What is a Business Line of Credit?

Think of it like your own personal credit card. The financial institution authorizes you to spend up to a fixed amount of money for your business. As soon as you tap into these funds, you are responsible for paying the full amount back as well as interest charges. If you fail to provide the required minimum, your credit score will suffer.

As an entrepreneur, you might need extra money to fill a temporary cash flow gap even when sales are brisk. On the other hand, it might be necessary to keep your doors open and staff paid during lean times. Just recognize that using all of the money your bank has authorized for you can have real world ramifications.

Your Personal Credit Score

In order to obtain your business line of credit, your personal credit score would have been one of the key factors that determined whether you were accepted. Two of the most significant elements used when coming up with this number are your credit utilization and your long-term debt, which are reported monthly to the consumer financial bureaus. Once you are given a business line of credit, however, your business credit card information is generally not reported to the consumer bureaus. That being said, failure to pay on time will be indicated on your credit history and could come back to haunt you.

Hidden Fees

Your credit limit is just that: a ceiling above which you cannot go. If you happen to exceed that amount for whatever reason, you literally will pay the price thanks to the often very well-hidden credit card fees buried deep in your contract. With every charge that goes above that boundary set by your business credit card company, you will receive a charge. Don’t assume that technology will come to your rescue and prevent your transaction from going through. A far better strategy is to keep a sharp eye on your spending, always maintaining a safe cushion that you don’t go beyond.

Loss of Benefits

When you signed up for your card, you were probably enticed by perks such as cash-back rewards or even dining points. Should you play fast and loose with your credit limit, your bank will begin to perceive you as a high-risk borrower who is more likely to default on the loan. When this happens, the institution can, at their discretion, remove the rewards and low-interest transfer programs that made your card so appealing in the first place.

What You Can Do Instead

Sometimes, maxing out your card can’t be helped, but this isn’t always the case. Rather than spending in the extreme on one card, consider distributing your expenses onto more than one. As an alternative, careful monitoring of your spending might give you leeway to request a limit increase from your bank before you step over your boundaries. Finally, do some research to see if there are other sources of funds that can get you through your time of need. These include bank loans, non-traditional loans, merchant cash advances, and crowdfunding.

The bottom line is that lenders want to minimize the chances that they will lose money by letting you borrow from them. Maxing out your credit line sends a red flag suggesting that you are desperate and possibly in imminent danger of failing. If you dedicate yourself to being vigilant about how much you spend and distribute it across different cards, you can minimize the necessity of reaching your business line of credit limit.