A credit line is a source of trouble if you don’t know how to use it right. But, if you do—it is one of the most accessible and easy to use financing. It can help you do renovations, spend for a ‘royal’ wedding, get that sleek car you may have been dreaming about or go on a dream vacation.

Here are tips to make sure that your credit line won’t rack up excess debt.

Understand that a credit line is a pool of money that you can use as a tool to build up your wealth

While it is available for borrowing, a line of credit has a maximum limit, and borrowers have the option of not using the money at all. It is quickly available and you can borrow up to the maximum amount whenever you need it.

You will only pay interest on the funds that you have drawn and not the whole amount. This type of arrangement allows you to have available capital whenever you need it. Plus, even those with bad credit can access this type of financing. You can also use it for any business-related purpose. When you pay on time—a line of credit is a great tool to improve your credit score.

Know how much financing your business will require this year

Create a projection as to when you will need the money and from where do you expect it to come from. When you make a plan in advance, you can avoid falling into short term cash shortages and at the same time. It can also help you allocate the money well.  To do this, it is advisable to create a cash flow budget. Make an estimate of all cash receipts and all cash expenses that you expect within the 1st quarter and for the rest of the year. Or, you can make monthly cash flow budget, to study the money movement each month.

By doing so, you can think through your plans for this year and the coming year. You can test your plans each month to see if you can increase your profit and meet all your cash needs without using your line of credit. Besides, you can also make projections on how much credit line you need to carry out a project and how much of it you can repay within the year.

Improve your budgeting skill set

Perhaps you know your trade really well and it is possible that your business is more profitable than ever. But, bookkeeping is a must—in fact it is one of the most powerful tools to reduce losses. So, get started with budgeting.

Make at least a good approximation of how much you will need in the coming months. Estimate both the expenses and the revenue to determine whether you will have sufficient money for your day to day operations. Do you have enough funds to grow your business or possibly to generate your expected income?

By making a budget you are reducing the risk of spending more than what your business is taking in. It can also help you take practical steps using a sufficient amount of money to grow your business and make it competitive. Use some parameters that could help you meet all your expenses and at the same time increase your profitability.

For example, you can use your line of credit to update payments on rents, utility bills and cost of goods sold. In the meantime, you can study your books and see where you can make some adjustments to free up some cash for your debt repayments. You can also figure out what an average monthly expense for business operations you may need, and if it is possible to have some extra money based on your profits to expand the business.

Choose the right credit line lender

You can ask a friend, relative or someone you know that has recently gotten a line of credit about a lender they can recommend. Ask for referrals from your financial advisers. Alternatively, you can do your own research and look for specialised lenders that offer affordable credit lines, with manageable payments terms to people with bad credit. The application process is simple. Just apply like you would have for a credit card or a personal loan.

Make sure that you meet their lending criteria such as your borrowing history, income and assets (for secured line of credit). But, before you sign the contract make sure that you have cleared up all your doubts with regards to interest rates and hidden charges. Credit lines may appear to be affordable on the outside, but if you don’t pay on time and if you happen to choose variable rates that may rise quickly, you may end up paying more than what you signed up for.

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