Nine lines of credit mistakes from application to closure

Some lines of credit mistakes have no immediate visible cost, and poor choices about a limit or lien can create problems later.

Nine of them, from the week you apply to the week you close the account.

What to take away

1. Applying at the moment of need

An application made when cash is comfortable and one made when it is not are read differently, because the same figures tell a different story alongside a recent overdraft or a stretched payables ledger.

Arrange the facility when you can demonstrate that you do not need it. That is also when you have the patience to compare institutions properly, which is the second reason it costs less.

2. Taking the largest limit offered

A bigger ceiling can feel like a free upgrade. It is not always free, because a charge on availability may apply to the whole limit rather than to the part you have not drawn, and because a limit changes how people behave around it.

Ask which base the availability charge applies to before agreeing a size. Then size the facility to the gap you actually measured, not to the number you were offered. What each charge is levied on is set out in lines of credit cost.

3. Believing an approved facility is money in the bank

An agreement can require conditions to be satisfied at the time of each draw, not just at the outset. It can allow the limit to be reduced. It can be repayable on demand.

Before relying on the facility, review the agreement for conditions that must be met for each draw, any borrowing-base or financial-covenant tests, required advance notice, and circumstances that let the lender reduce the limit. Find out whether the facility is committed or payable on demand, and note any deadlines that apply.

A facility that can be pulled quickly is still useful, just different from what people picture. It should not be the only plan behind an obligation you cannot miss.

4. Drawing on it to pay another lender

Moving a balance from one lender to another feels like progress and usually is not. The obligation has not shrunk, the facility that was there for timing gaps is now occupied, and you have added a second creditor's view of your file to the first one's.

Where the payment being covered is itself an expensive short-term product, the pattern can accelerate. The version of this that does the most damage is described in merchant cash advances.

5. Making it the only plan behind payroll

Payroll is the obligation with the least tolerance for a surprise, so it deserves the most dependable source of funds, not the most flexible one.

Keep a second identified option, arranged in advance. Not researched, arranged, or at least discussed to the point where you know it exists and what it would take. The point of doing that early is that it is done calmly.

6. Ignoring the charges that apply at a zero balance

Maintenance, annual, and renewal charges may accrue whether or not you draw; the agreement's fee schedule should say which apply and how each is calculated. With little borrowing, recurring charges can make the cost per dollar borrowed much higher than the stated interest rate.

Before signing and at each renewal, total the annual standing charges and divide by the average balance you realistically expect to borrow. That gives a rough annual cost from standing charges as a share of the expected average borrowed balance, before interest and transaction fees. If the option is worth its price, keep it knowingly. The arithmetic is short and it is set out in the lines of credit calculator.

7. Accepting a blanket filing for a modest facility

Security over everything you own is a wider commitment than security over an identified asset, and it stays in the way of other financing while it stands. So does an uncapped personal guarantee, which removes the separation your entity was created to provide.

Neither is unreasonable in itself. Both are worth a question: is a narrower filing available, is the guarantee capped, is it joint and several among owners, is a spouse being asked to sign, and what releases it. The provisions are described in application and repayment.

8. Rolling the renewal for years without testing anything

Facilities renew. Renewals carry charges, terms drift, and the market moves. A facility arranged years ago and never re-examined is being priced by inertia.

Read the agreement for the renewal date and any notice deadline, and confirm how far ahead the lender needs financial statements or a renewal request. Set your review date before that deadline, leaving time to hold a conversation elsewhere. Even if you stay, arriving at renewal with an alternative in hand changes the conversation.

Keeping reporting current matters too; stale financials often cause a limit cut at review. The background is in lines of credit.

9. Closing it badly, or not at all

Repaying the balance is not closing the account. Two things are commonly left undone.

The filing. A UCC Article 9 lien is generally recorded through a UCC-1 financing statement; paying the debt does not itself show that the record was terminated. Ask the secured party to file a UCC-3 financing statement amendment to terminate it under applicable state law. Then search the UCC records with the Secretary of State or other designated filing office in the state where the financing statement was filed, and confirm the record is marked terminated.

The guarantee. Ask what releases it and get the release in writing. Guarantees frequently outlive the facility they were signed for and can survive the sale of the business.

And if you are keeping an unused facility open, decide that deliberately each year rather than by default, because the standing charges continue either way.

Where to check anything specific

Charges, conditions and criteria come from the institution and change without notice. For neutral background on business financing, the SBA business guide and the FDIC's Money Smart for Small Business sell nothing.

Common questions

Which of these is the most expensive?

Usually the security one, because a wide filing or an uncapped guarantee constrains everything you try to do afterwards, long after the facility itself has stopped mattering.

Should I take a facility I do not expect to use?

Only with the cost of the unused state in front of you. Availability is worth paying for sometimes, and the way to know is to divide the annual charges by the borrowing you realistically expect.

Is using a facility to repay other debt always wrong?

No, but be honest about what it achieves. If nothing underneath has changed, you have moved a problem and consumed the headroom you kept for timing gaps.

How do I confirm a lien was terminated?

Ask the lender for written confirmation and then check the public filing record yourself. Do not assume it happened.