While having added access to capital is certainly recommended for any business owner, it is always important to handle the money owed in the right manner. Otherwise, your debts can turn from a helping hand into a monster that drags your company into the mud. Here are a few ways in which a credit line can actually do more harm than good along with tips about how to avoid these scenarios.
Too Much Interest Is a Burden
If your money management skills aren’t optimised, it is easy to borrow too much and maximise your debt potential very rapidly indeed. This can then result in the highest level of interest possible, an amount that you’ll then have to devote a lot of time and energy into paying off. This can push your business back in the following ways:
• You lose plenty of money diverting funds into your maxed-out credit line in an effort to pay off the interest first and then the money borrowed.
• You waste employee man hours sorting out the problem, negotiating with credit lenders and trying to find new sources of income.
As you can see, being irresponsible with these types of loans will put your business into a risky financial situation where an immense effort is required to pay your debts off on time.
Your Assets May Be Liquidated
Depending on the terms and conditions that you agreed to, your commercial assets may end up being lost if you are unable to pay everything off in the agreed-to timeframe. While you took out your line of credit for positive reasons at first, mishandled cash management now sees your assets at risk of being repossessed. Of course, this is only an extreme situation that results if you have borrowed so much that your corporate income cannot handle the resulting repayments. Hence, before you sign on the dotted line, you should find out what objects you’ll put up as collateral and what the chances are that these items will be taken from you due to poor financial planning. Then, make sure that you stick to these terms and conditions so that your valuables remain in your possession later on.
Business Priorities Are Diverted
One final consequence of maxing out your credit line is that you’ll have to focus on paying everything off (and possibly avert your valuables being repossessed) instead of handling other matters crucial to your corporate growth. For example, you may miss out on fixed funds, stock market deals and other investment opportunities simply because you are too busy struggling to pay off your debts.
All of this will result in a business that stagnates, unable to move forward because of the credit issues crippling it. This is not to say that borrowing money is a bad thing however. On the contrary, it can help your business grow and develop quite well as long as it is handled in the right manner. Poor planning and forecasting can result in complete disaster for those with their own corporate credit line however.