The International Monetary Fund (IMF) has said that the global economy is likely to shrink by 3 percent this year. The U.S. economy is doing even worse: it plummeted by an annual rate of 5 percent in the first quarter of 2020. For small businesses, these societal changes compound the already-intense competitive pressures they face. As of May 2020, only 48 percent of U.S. small businesses reported being comfortable with their cash flow.
Despite small businesses’ clear need for easier access to credit right now, lenders are tightening purse strings as they shy away from risk. Financial institutions such as JPMorgan Chase, Bank of America, and CapitalOne are now requiring higher credit scores and more documentation, and some are reducing borrowing limits.
Capitalize on Your Retirement Funds to Boost Your Business
So what’s a small business owner to do? A promising option for those who can is to tap into a line of credit.
6 Reasons to Tap into Your Credit
A line of credit isn’t the cure-all for every problem, but there are times when tapping into it is a smart, strategic move — both for individuals and for small businesses. Here are some good potential reasons to use your credit.
1. Pay for Time-sensitive Expenses
Some things just can’t wait. Maybe you need to buy personal protective equipment (PPE) to ensure your staff is safe as you reopen, or maybe you can see the benefit of stocking your shop with items people need now.
2. Cover Operating Costs in a Crisis
If your business is in an emergency situation, a line of credit can cover some basic costs to keep the lights on. Maybe you need to pay the electricity bill or make payroll. A line of credit can be a lifesaver.
3. Emergency Repairs
Sometimes you have no choice but to pay for unexpected repairs to your home, office, or facility. Perhaps you need to replace your HVAC (heating, ventilation and air conditioning) system, patch the roof, or fix a broken window. These things can’t wait.
4. Value-add Renovations
Making improvements to your home, office, or facility that will increase its value can be a worthwhile use of your credit, assuming the financial benefit from doing so is likely to cover the cost of your borrowing.
5. Debt Consolidation
It can be a good idea to use a line of credit to pay off high-interest loans, such as credit card balances, and consolidate multiple debts into one payment. Make sure to only pay off debts with a higher interest rate using your line of credit.
6. Education and Training
A line of credit can be useful in funding education that opens new opportunities, whether you use it to fund your child’s college tuition or to further your own education to take your career in a more promising direction.
4 Credit Mistakes to Look Out For
For all the good reasons that exist for small business owners to use credit, there are also reasons to approach borrowing carefully and thoughtfully based on need. Using credit without the right motivation or without being careful about repayment can get borrowers into trouble.
Here are four mistakes to avoid as you consider borrowing from a line of credit:
1. Borrowing for Unnecessary Expenses
Avoid borrowing to pay for expenses that aren’t essential or aren’t sure to provide a positive return. Always consider whether the things you’re borrowing for are expenses you can (and should) save for instead.
2. Borrowing More Than You Need
It can be tempting to borrow more than you really need to cover optional expenses that you want to get out of the way. But borrowing more than you absolutely need increases your risk unnecessarily and can lead you into a vicious cycle of debt that can devastate your finances.
3. Paying Bills Late
Repaying what you’ve borrowed late can be an unforced error that only compounds your debt as you are hit with late-payment fees. Even if you can only pay the minimum amount, do what you can to make on-time payments.
4. Only Paying the Minimum
While only making the minimum payment may be necessary during a cash crunch, it may not be a good idea to borrow from your line of credit if that’s all you’ll be able to afford to pay off each month. If you always (or frequently) make minimum payments, accumulating interest will add up, and you may end up paying more in the long run.
What to Do If You’re Struggling
There’s no shame in struggling financially right now. We’re in a global pandemic and businesses are doing anything they can to stay afloat. If you’re behind the eight ball, look into the following options to find a little relief.
- Seek out a relief loan. The Small Business Administration (SBA) has a variety of programs in place to help small businesses affected by the pandemic. The “find local assistance” page can help you find financial relief in your area and determine which of the SBA funding programs — the Paycheck Protection Program, EIDL Loan Advance, SBA Express Bridge Loan, or SBA Debt Relief — is right for you.
- Refinance your existing loans. The Federal Reserve has been slashing interest rates in response to the uncertainty brought on by the pandemic. Low interest rates provide a good opportunity to refinance your debt at a lower rate and save serious money.
- Call your creditors, insurers, and utility companies. You may be able to work out new arrangements with the companies to whom you owe money each month. It’s worth calling them to explain your situation and see whether there’s a new payment rate or schedule you can arrange, or a temporary discount you can take advantage of.
- Pivot your business or supplement your income. The pandemic is changing all our lives so profoundly that many people have new needs they didn’t have before. See if there’s some way to pivot your business in a new direction to satisfy those needs. Alternatively, you can pick up a side hustle to supplement your income. Thinking creatively can open your mind to all sorts of money-making opportunities.
A line of credit isn’t necessarily the answer to all your difficulties in this unexpected global crisis, but it can be an excellent option for getting out of a sticky financial situation or investing in a new course of action to help your business flourish.
Katherine Gustafson is a finance and business writer. Her work has appeared in finance and business publications such as MagnifyMoney, Student Loan Hero, Forbes, and Business Insider.