How to Use a Line of Credit
Equine veterinarians often have a line of credit for their businesses, but do you know the best ways to use it?

A line of credit can give you purchasing power to take advantage of deals at a trade show. Courtesy AAEP

Due to the seasonality of equine veterinary business, practice owners might need to borrow money to meet financial obligations. One commonly used option to obtain these funds is by securing a business line of credit (LOC). A business line of credit is an arrangement between a financial institution—usually a bank—and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain.

Like with most loans, borrowers must be approved by the bank through an examination of the borrower’s financial position, credit rating and/or relationship with the bank. Some, but not all, banks charge a monthly maintenance fee if you do not use the line of credit, and interest is charged as soon as money is borrowed.

Terms of the line of credit are usually annual, with an interest rate based on the prime rate plus one to three percent. Payments are interest-only on the amount borrowed, but typically banks expect to see that the line has been paid down to a zero dollar balance at some point during the year. Once the line of credit is established, the borrower can withdraw funds at any time, as long as the cash does not exceed the maximum set in the agreement.

Most small businesses experience cash flow problems from time to time. These cash flow shortfalls can arise from a variety of reasons, ranging from a large account falling behind in payments to a seasonal variation in revenue production. Day-to-day operations require an uninterrupted supply of cash (capital). While the optimal thing to do is save enough money to weather these times, obtaining a line of credit provides a ready source of funding to keep your business running smoothly. Be sure to make your application for a LOC while you are in a comfortable financial position in order to qualify for the credit easily. Don’t wait until you desperately need money!

Your line of credit will be there to access whenever you need it, and generally it won’t cost you much (if anything) if you don’t need to take money out on this loan. Because lines of credit can be drawn on and repaid on an unscheduled basis, some borrowers might find the interest calculations more complicated and might be surprised at the amount they end up paying in interest if they do not repay the principle promptly.

While a line of credit can smooth out a rough patch in earnings until your business is producing strongly again, note that a line of credit should not be used to rescue a practice that is experiencing a serious ongoing financial crisis; it should be thought of only as a tool to use while waiting for accounts receivable to be paid. Lines of credit are meant to be used, paid off quickly, then used again when necessary.

Having cash readily available allows a practice owner to take advantage of an opportunity to purchase inventory at a low price, or to offset anticipated seasonal dips in revenue.

Small practices, especially those that have just started, often have more expenses than revenue in the slower seasons. For example, you might need to purchase vaccines to have on hand before the flurry of spring visits occurs, but you won’t be paid for that inventory by clients until you use the vaccines to provide services. You might need more inventory before you have earned and received enough revenue to pay for it. A line of credit can help you meet your obligations in a timely fashion.

In addition, a line of credit can finance projects where it is difficult to ascertain the amount of funds needed until the plan is actually underway, or to help pay your estimated quarterly tax payments. Sometimes even meeting your payroll can be tough if one of your major clients fails to pay his or her invoice in a timely fashion. Having a line of credit can help you sleep better at night! 

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