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Line of Credit - Payback in Full or Monthly Payments?

Line of Credit - Payback in Full or Monthly Payments?

Should you keep your outstanding line of credit and pay down like a loan or should you pay it back in full once invoice funds come in?

RESPONSE: I recommend you pay most of the line back initially and for the first few times. It may be inconvenient initially to use it then pay it off repeatedly, but in my opinion it also shows that your goal is to use the line as intended and to pay it back quickly while managing the line as needed. What you don’t want to happen early on is for your line to be used up and not paid back for a long period of time. Then you have to go back for a higher line amount without ever having paid back the original line.

Perception, perception, perception is important. Especially for a small business and in this volatile credit environment.

I believe that if you use the line for what its’ intended purpose is, let’s say for cash flow until invoice payment is received, then you should show you are paying back on the LINE and then using it again for the intended purpose., you can try to negotiate better/longer payment terms (such as 30-45 days), as I do.

I feel a line of credit is provided for different use then a loan. A loan is typically payed back over time at set monthly amounts. It is expected by the lender to be handled that way. A line of credit is "typically" used for as needed situations and is more like a revolving account.

You must remember also that you are saving the company the Interest Expense for the time the Line is not used. And Interest Expense on the Line of Credit is an UNALLOWABLE cost. You cannot charge the government for any interest expense. It comes out of your fee/profit.

If you find you are using the line every week just to make payroll then I would consider “How Much” of the line to pay and how much to keep in your bank. This is called "Cash Flow Management".

For most of your other bills

Another factor that may impact your decision is who provided the line of credit and the relationship you have with the lender. If the funds are provided by an investor you may have more flexibility in what payment terms are expected.

So Use The Line, Then Pay it back, Use the Line, Then Pay it back, etc., etc., etc.

Hope this helps!

Disclaimer: Information provided is based on our experience, training, and judgment in interpreting the practical application and intent of official guidance and regulations.  It does not represent the official position of any government agency or their representative.