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Is your credit line appropriate for your business' recession plan?

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According to a June 2022 Goldman Sachs survey, more than 90% of small business owners fear they will experience a recession in the next 12 months.

Lenders tend to tighten lending standards during recessions, so small business owners may be looking for ways to secure funding before access to credit may be reduced.

One option to consider is applying for a Business Line of Credit. Even if you don’t need it now. Unlike a business loan, a line of credit allows you to decide when and how much to withdraw, up to a set limit.

Will your business benefit from the line of credit?

Access to funding is typically reduced during a recession, so it’s a good idea to obtain a line of credit before you need it, especially if cash flow problems are likely to arise in the future. To do.

For example, if you plan to make a large investment in inventory or materials, or undertake a project that requires a large cash outlay before receiving payment from a customer, a credit line will ensure that you have the funds to do so in the future. It helps to

In addition, the line of credit can be used to cover operating expenses such as rent, wages, insurance and maintenance in the event of a short-term decline in earnings.

In general, lines of credit are a good option for businesses concerned about fluctuations in their funding needs, said Carolyn Katz, a mentor at the New York City chapter of SCORE, a nonprofit that provides education and mentoring to small businesses.

When you decide to apply for a credit limit, “make sure you get one that’s available,” says Katz. Earn your way to a bigger line.

Are there any downsides to having a credit line?

If fluctuating cash flows are not an issue, the decision to apply for a credit facility becomes more complicated. Lines of credit can be used as a reserve or emergency fund during difficult economic times, but there are drawbacks to consider when acquiring something that may not be used.

It takes time to apply and complete the necessary paperwork. If you don’t use the line, the lender may charge maintenance fees and your limit may be lower than you would like. Lenders also review credit lines, even those that are unused, when evaluating borrowers, which can adversely affect their ability to obtain other types of loans.

What do I need to do to obtain a line of credit?

If the benefits of a line of credit outweigh the drawbacks for your business and you decide to apply, lenders will usually look at your business’ profitability, credit score, and accounts receivable. Accounts receivable (amounts owed by customers for goods or services) represent future earnings that can be used to pay off credit facilities.

“Receivables are important for all types of loan products, but they are the most important criteria for credit lines,” says Katz.

Also note that older receivables may be considered at risk of nonpayment. “If you’re considering a line of credit, try to keep your receivables below 60 days,” Katz said.

When should I apply for a line of credit?

Shauna Huntington of the NAWBO Institute of Entrepreneurial Development, a non-profit educational foundation of the National Association of Women Business Owners, said business owners in need of credit should consider getting one before they actually need it. says there is.

“If you take a large order and wait until you need a line of credit to produce it, then it becomes difficult to go to the bank and ask for that amount and get it done quickly,” says Huntington. says Mr.

With the option to withdraw funds as needed, the Business Line of Credit could be the right move for companies concerned about future cash flow issues. However, lines of credit used solely as a way of hedging bets on an uncertain economy are an unnecessary expense and may offer little if any benefit.


This article was provided to The Associated Press by personal finance website NerdWallet. Lisa Anthony is a writer for her NerdWallet. Email:

Related Links:

NerdWallet: Is there a minimum credit score to qualify for a business loan?

NerdWallet: How to use the Accounts Receivable Aging Report

The Small Business Challenges Worsening Amid Record Inflation and Labor Shortage Study will be conducted June 20-23, 2022, using 1,533 Goldman Sachs 10,000 small business participants and 48 US Small business owners from states and two US territories were included.

Babson College and David Binder Research. (June 2022). “Survey: Challenges for small businesses worsen amid record inflation and labor shortages.”