In your nonprofit, you may be wondering why you’d need a nonprofit line of credit. After all the bad things you’ve heard about debt, you might think you should just steer clear of borrowing.
It’s understandable to have that opinion. Debt can be an albatross around the neck of businesses of all sorts, whether for-profit or non-profit organizations. When used responsibly, though, lines of credit can tremendously enhance the ability of a nonprofit to conduct its operations, adding financial flexibility and improving the resilience of the firm.
But just how should you use credit to unlock these possibilities? How can you avoid the pitfalls? Continue reading below to find out how best to use nonprofit lines of credit responsibly.
Keep Your Utilization Rate Below 30%
If you remember nothing else from this article, remember these words of wisdom: Keep your credit utilization rate below 30%. (Don’t know what a credit utilization rate is? Check out our article “Non-Profit Credit Lines: How to Qualify” for a quick primer.)
Keeping your credit utilization rate below 30% is key to keeping your credit score pristine and healthy and many nonprofits simply don’t have this problem because, in the past, it has always been hard for them to be approved for a business loan or line of credit.
Let’s say that you have a single credit card. The limit is $5,000 and you’re not carrying a balance. But then you take out a line of credit for $10,000 and max it out. Your credit utilization rate has just jumped from 0% (0/5,000) to 66% (10,000/15,000). This has a dramatically negative effect on your credit rating.
But what if we consider another scenario? Let’s say you’ve still got that single credit card with a limit of $5,000 but you’re carrying a balance of $3,000. You open a credit line for $10,000 but you leave it untouched (in case of emergency). Now, your credit utilization rate has gone from 60% (3,000/5,000) to 20% (3,000/15,000). A big win for your credit history.
As you can see, opening a new line of credit for your nonprofit can, in the right circumstances, be a boon to your credit score. That’s on top of the benefits you see in terms of operational flexibility.
Go Slow
So, what else can you do to use a nonprofit credit line responsibly?
Basically, it’s important to have a plan. A credit line isn’t like a loan where you receive a lump sum of money up-front and pay it back in a structured fashion over time. Instead, you can take as much, or as little, as you want from it which means you pay as much, or as little, interest or fees as you choose as well. This increases the flexibility of the borrowing strategy but it can also increase risk.
It requires discipline and responsibility to use a credit line wisely. The best bet is to take it slow. Try to avoid making huge withdrawals from the credit line that you have no idea how to pay back. Luckily, Nonprofits don’t have this problem. When nonprofits use their line it is usually because they know cash is coming in but they have to pay a bill or make payroll now.
Pay Back Quickly
The faster you pay back the lender what you borrow from the line of credit, the less interest or fees you pay. Responsible credit line use almost always involves paying back the amounts borrowed from the bank relatively quickly. Remember, credit lines aren’t like loans. They’re designed to increase your ability to respond to inconveniently timed financial demands, not for long term borrowing.
Keep in mind as well that, if you pay back the amount borrowed fast enough, you often won’t pay any interest or fees at all. That’s because many credit lines have a grace period during which interest or fees are not charged if payments are made in full.
Have a Plan
This brings us to our final point. When dealing with a nonprofit line of credit, it’s important to have a plan with respect to using it. By that, we mean that debt should never be treated as cash. Just because you have fresh and unfettered access to a large pool of credit doesn’t mean that you should treat it as a bank account.
Every dollar you withdraw from the credit line is one that must be accounted for and repaid in time. So, it’s best to have a specific plan for how you are and are not going to use the credit line before you take cash from the line of credit.
It’s important to have this plan before you open the line of credit because having a plan increases the chances that you will pay the line back.
So, what should the plan consist of? Basically, you should decide what you are willing to use the line of credit for. You’ll also want to plan how you’re going to pay back each withdrawal. Examine your monthly cash flow and ensure it is sufficient to pay back both the principal borrowed and any interest charges that accrue.
Next Steps
Now that you know how to use a credit line responsibly, why not check out the Line of Credit offered by Financing Solutions? The online application takes just a few minutes and you can see if you qualify for one of our fantastic nonprofit lines of credit today! Our Line of Credit costs nothing to set up and nothing when not being used making it a great cahs backup plan. Plus, our line requires no collateral and no personal guarantees.
If you have any questions, give Financing Solutions a call at 862.207.4118 or email us at your convenience. We’d love to talk to you about how we can help you.
