As a small business owner, sometimes you need access to capital that you simply don’t have in the bank.
Whether you face unexpected expenses or need extra capital to expand your product line, business credit is an important part of any company’s financial toolkit.
However, just like with personal credit, you can’t borrow as much money as you’d like. Credit card issuers and banks determine the upper limit of what you can access, also referred to as a credit limit.
For a better understanding of what a credit limit is and how financial institutions determine it, continue reading below.
We’ll explore the impact a business’s credit limit has on its financial operations, plus provide practical tips for optimal credit management.
What is a credit limit?
A credit limit is the maximum amount of capital you can access or borrow via a credit card, loan, line of credit, or other financial instrument.
Credit limits apply to both individuals and businesses. However, in the context of this article, we will focus strictly on business credit limits.
As we’ll discuss in further detail below, credit limits are determined by individual lenders or credit card issuers, depending on various factors.
Upon opening up a new account, the issuer or provider will inform you of the credit limit. For instance, when applying for a business credit card, you may qualify for a credit limit of $20,000.
This means that while your account remains open and in good standing, you can charge up to $20,000 on the card at a given time.
How is a business’s credit limit determined?
The credit limit your business qualifies for is determined by the financial institution where you’re applying for a credit card or loan.
The institution sets your limit based on the perceived risk and financial position of the business. It reflects the amount they think you could reasonably borrow and repay.
Here are some of the main factors that credit card issuers and lenders consider when determining your business credit limit:
- Business credit score
- Revenue
- Cash flows
- Bank statements
- Historical financial performance
Each institution utilizes its own underwriting standards and risk management practices. So, the credit limit you qualify for may vary between providers, even if you provide them with the same financial information.
Businesses that are newer and have a thin or nonexistent credit history may be able to use the owner’s credit as a way to secure funding. However, this is not always permitted and may result in a lower limit and less favorable terms.
The importance of credit limits for small businesses
Having access to credit can provide small business owners with a wealth of advantages.
It can give them extra flexibility when they’re short on cash, ensuring they’re able to meet near-term obligations without interruption.
For instance, maybe you’re waiting on a substantial client payment to come in next week, though you need to pay a contractor who came in to fix your office’s air conditioning unit by the end of the day.
If the service provider accepts credit card payments, you can pay the invoice in full to avoid incurring late fees and penalties without any cash leaving your business bank account in the meantime.
Thus, a healthy credit limit can support cash flow management and business planning, allowing you to make purchases to support and grow operations even if you don’t currently have the funds in your account.
Of course, the higher the credit limit, the more flexibility you have. However, it’s also important to draw on your credit responsibly and understand that you must pay it back according to the terms set out by the card company or bank.
How credit limits differ across credit types
In general, business credit applies to three types of financial instruments: credit cards, lines of credit, and loans.
While each type of credit facility offers unique advantages and operates on specific terms, the same concept of credit limits applies to all.
However, the amount of credit you can qualify for will vary significantly across each type. Here is what you can expect:
- Loans: Generally offers a higher limit, though involves a one-time disbursement of the approved amount
- Lines of credit: A flexible and revolving credit line often at a lower limit than loans; businesses can borrow up to the limit and repay multiple times while the account remains open
- Credit cards: Similar to lines of credit, businesses have a fixed limit that dictates how much they can borrow on a given payment cycle, which typically repeats each month
In sum, the credit limits set for business credit cards and lines of credit are often lower than the loan amount you qualify for.
However, you can continually draw on your credit line or use a credit card up to its limit month after month – as long as you repay the borrowed amount.
So, you may end up accessing more capital through either of these products than you would a loan, even if the approved amount is higher.
How credit limits affect credit scores
A business’s credit limit and how it uses the available funds can impact its credit score.
The credit limit itself may not have a large impact on a business's credit score–it’s more so the credit utilization that can influence a business’s creditworthiness.
For example, if a business has a $100,000 credit limit but only uses $10,000, the utilization ratio remains low, which can positively affect its credit score.
The opposite is also true. In the same scenario, if the business consistently draws up to its credit limit, it may harm the organization’s credit score.
Best way to increase credit limits for businesses
Knowing how to effectively use and manage business credit is important for financial stability and cash flow management.
The following are some of the practical tips and suggestions you can apply to optimize your business’s credit limit:
Build a good credit history
Business credit works very similarly to individual credit. Your business has a credit score, which is based on factors like payment history, credit utilization, and length of credit history.
Just like you can improve your own credit score over time to get better rates and terms, you can do the same for your business.
This means making on-time payments to creditors and keeping your credit utilization ratio low. In doing so, you can show banks and credit card companies that you use credit responsibly.
Grow revenues
As we mentioned above, you can optimize your credit limit by increasing your company’s sales performance.
If you can show lenders that you have sustainable revenue streams and incoming cash flows, they may be more willing to offer you a higher limit.
Use credit responsibly
Just because you’ve been approved for a certain credit limit does not mean you must or should max it out.
Remember, the credit limit is the maximum amount that you can borrow, which you will eventually need to repay.
While you can draw up to this amount when you’re in a pinch, it’s often better to only draw down capital as needed.
Again, this shows lenders and card issuers that you’re responsible and able to pay them back. Though it may sound counterintuitive, it can help you qualify for a higher limit in the future.
Make good relationships with creditors
Getting a healthy business credit limit isn’t all about the facts and figures. Building and maintaining relationships with lenders and creditors can also help you increase your limit.
Keeping open communication with your creditors and providing them with updates on your business’s progress and achievements can show that you’re committed and responsible.
While not a foolproof method, it doesn’t hurt to be transparent and communicative, which can make them more likely to offer you a higher credit limit.
Regularly review your limit
Credit limits aren’t set in stone. Over time, it may be adjusted to reflect your new financial situation.
If your business’s financial needs change and you require access to more credit, have your creditor review your account to steadily increase your limit.
If you initially qualified for a $10,000 credit limit a few years ago, but you’ve since tripled your sales and improved your business credit history, you may qualify for a higher limit.
How SMBs can access flexible credit solutions
Credit limits are an important part of any small business’s financial strategy. Even if you don’t think you need access to capital right now, having an open credit line or business credit card to use means you can cover emergency expenses or take advantage of growth opportunities without hesitation.
Over time, you can increase your credit limit through careful utilization, on-time payments, and other strategies, offering even more financial flexibility for your small business.
If you’re not sure where to start with business credit, check out the BILL Divvy Card powered by Visa* for flexible credit that scales with you.
Small and medium-sized businesses can access credit lines from $1,000 to $5 million, making it easy to access the funds you need, no matter your growth stage.
Get started with BILL today and see how easy it can be for your business to access the credit it needs to grow and thrive.
*The BILL Divvy Card is issued by Cross River Bank, member FDIC, and is not a deposit product.
