How To Use A Business Line of Credit Like A CFO | Ep 3

How to Use a Line of Credit the Right Way | Full Send CFO

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📢 A line of credit can be a powerful tool for cash flow management—but only if used correctly. In this episode, we cover:
✔️ What a line of credit really is (and what it isn’t)
✔️ The best times to use it for growth without risking financial strain
✔️ Biggest mistakes businesses make with lines of credit
✔️ How to manage it like a CFO for long-term success

⏱️ Chapters

00:00 - Introduction: The Power & Risks of a Line of Credit
00:48 - What is a Line of Credit (and What It’s Not)?
01:44 - When to Use a Line of Credit Strategically
02:38 - Best Uses: Working Capital, Seasonal Fluctuations & Marketing
03:32 - The Wrong Reasons to Use a Line of Credit
04:38 - How to Manage a Line of Credit Like a CFO
05:55 - Key Terms to Negotiate Before Signing
06:37 - Final Thoughts: Is Your Line of Credit Helping or Hurting Your Business?

Key Takeaways:
✔️ A line of credit isn’t cash flow—it’s a tool that must be used wisely.
✔️ Best used for short-term working capital needs, not long-term debt.
✔️ Avoid debt spirals—never use a line of credit to pay off other debt.
✔️ Negotiate terms upfront—interest rates, fees, collateral & repayment flexibility.
✔️ Maintain a strong financial position to get the best credit terms.

📢 How do you use your line of credit? Comment below!

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#LineOfCredit #FullSendCFO #CashFlowManagement #BusinessFinancing #CFOInsights

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Transcript

A line of credit can be one of the best things that you can have access to as a business owner. If you use it strategically, you can use it to manage cash flow, to invest in growth, and avoid really costly mistakes. But a line of credit isn't cash flow, it's a tool. And like any tool, if you use it wrong, You might get hurt.

I've seen so many businesses thrive with a well managed line of credit, but also I've seen others kind of sink under the weight of poor line of credit decisions when they're piling debt on top of debt. So as we look at how to leverage in line of credit correctly, we want to leverage that for stability for a growth without creating a cashflow nightmare.

So what is a line of credit? What's it not A line of credit is a revolving form of financing. So you borrow what you need, you pay it back, and then you borrow again. It is a short term financing tool. This is not a long term debt instrument.

So it is not the same as a loan. Interest is only charged on the amount that you use. That's expected to be payback in the short term. So it's not a piggy bank misuse of a line of credit can really lead to cashflow crunches, potential financial challenges as you navigate how to manage your cash appropriately.

So when are the right times to leverage a line of credit for growth for sustainability? Again, A line of credit is a short term instrument that is often used for working capital needs. So think about situations like your accounts receivable are delayed, or maybe you have seasonal fluctuations in your business, or maybe you're purchasing quarterly inventory ahead of a revenue spike that is coming.

If you're a seasonal business, the line of credit can be a phenomenal tool, particularly as you move through selling season in November and December. You pull that line of credit in late summer, early fall, you purchase your inventory, you ship it out and generate revenue in the selling season to then pay back the line of credit on that short term basis.

I wouldn't necessarily recommend utilizing a line of credit to cover payroll. However, when cash flow is temporarily tight, a line of credit can be used to fund payroll as well. One other element, That you could consider with line of credit financing is going to be utilizing it for funding, marketing initiatives.

If you've got a big launch, a big marketing effort expected to generate a high degree of ROI line of credit could be a great option for that. Now, when, when is it too risky? When is it a bad use of a line of credit to pull in order to utilize for your business, when we think about utilizing a line of credit to pay off other debt, That starts to create a debt spiral.

We do not want to use that because ultimately the flexibility of the tool will also yield in a higher cost of capital with a higher interest rate relative to a long term note. You do not want to use line of credit to fund any long term investments. Line of credits are short term tools Expected to be paid back on a short term basis. If you're trying to use a line of credit to buy time and you don't have a clear repayment plan, it's probably not a wise decision to use a line of credit. If you're just tapping into the line of credit because it's there and it exists and you want to maintain a certain cash balance in your business.

Okay. But generally I wouldn't recommend taking on debt to displace cash that you already have on hand, unless the yield ratio relative to the cost of capital makes sense. However, generally I would not tap into a line of credit because it is available to you. So how do we manage a line of credit like a CFO?

Before pulling out a line of credit, we need to already establish what the repayment plan looks like. If you're going to pull out 100, 000, where is that 100, 000 going to come from in order for you to pay it back in the short term? We generally do not want to pull more than 50 or 60 percent of your available line of credit, unless absolutely necessary.

You want to allow some cushion in there to allow you to have a little bit more flexibility. If you need to pull out more than that to fund working capital, and you have a clear path to ROI on that, okay. However, it may be better to look at a longer term debt instrument in order to fund the business. If you're constantly relying on greater than 60 percent of your line of credit.

It's generally recommended to keep the line of credit open, even if you don't need it. It gives you a great backstop. It's easier to renew your line of credit when it's already in place than to stand up a completely new one. So don't stand up a line of credit, use it for several months and then close it.

Just keep it open. It generally will not go away. Create a high degree of cost or expense to you in order to maintain that line of credit, being open on a month, month basis. You also want to negotiate your terms upfront, any good debt instrument. You want to make sure that you're negotiating your fees with the banker that you're utilizing to fund your line of credit.

If you negotiate terms upfront, like your interest rates, your repayment flexibility, your fees, that will help you to get better terms, get better costs of capital as you continue to pull on this line over time. Lastly, you just want to monitor your cash flow so that you do not over leverage the business.

You want to continually be looking at your current or quick ratio. So your current assets on hand relative to your current liabilities under which a line of credit would fall. And so you want to constantly be looking at that relationship to ensure that you have enough cash on hand to repay that obligation in the short term.

Take a look at your cash flow, your ROI on. sales and marketing spent as that will dictate your ability to pay back that debt instrument. Key terms to think about and negotiate before signing. Like I mentioned, interest rate and draw fees. There are fixed and there are variable rates. Understand the difference between those two.

What are the collateral requirements for your line of credit? Is this a line of credit that's secured by your assets, maybe by your revenue? Understand the key collateralization if you were to default on loan payments. What are the repayment terms? Is this a revolving line of credit or are there fixed payback periods?

and then lastly, does the bank require any bank covenants in order to carry a line of credit with them? So do they, require you to maintain a certain cash balance, a certain liquidity ratio in your business. They may push reporting requirements on to you in order to fund that line of credit.

So be thinking about the ancillary impact of signing these types of contracts that could have a ripple effect on your responsibilities moving forward beyond just accessing the capital. So final thoughts on this. If you're evaluating your current line of credit usage, are you using it strategically?

Are you using it in a way that is funneling growth to your business and not just as a constant plug in the hole of your cashflow cycle that may indicate other issues that need to be addressed beyond just the Line of credit. If you don't have a line of credit, considering setting up one, because if your business is in a financially strong position, you will get better terms on a line of credit, and it is always helpful to have it as a backstop in the event that market conditions or perhaps your revenue rhythms or business circumstances change, and you require an infusion of cash on a quick basis.

One other quick action item here is review your line of credit agreement. Check for those hidden fees, check for the restrictions, see if you can renegotiate those if you need to. Ultimately, the bank will be incentivized to keep that instrument open and accessible to you.

So have that conversation with your banker today. Make sure that you have access to capital and you are using it strategically to grow and create a more sustainable business.