Owning a business can be an incredibly rewarding experience, but it is not without its challenges. No matter the industry or size of the company, cash flow is always an obstacle to manage. Poor budgeting, inadequate capital, delinquent payments from customers, unexpected expenses, and other unforeseen circumstances can all lead to cash flow problems.
A business line of credit (LOC) can cover a variety of short-term financial needs, from unexpected expenses to covering payroll and supplier fees when revenue is down. A business line of credit can help small business owners secure funds to cover immediate needs.
What Is a Business Line of Credit and How Does It Work?
A business line of credit is a flexible form of financing that businesses can access as needed. It works in a similar way to a personal line of credit, providing businesses with access to liquidity and cash when necessary. A line of credit is usually revolving, meaning that you can tap into it repeatedly, as long as you haven’t hit your credit limit.
The business line of credit works like a loan in that the business can draw from the line of credit at any time. But unlike a loan, it only needs to be paid back when the money is used. It can also be more flexible than a loan because the business can choose how much they borrow and how often they draw from the line of credit. This makes an LOC an ideal solution for businesses that need short-term financing or capital for unexpected expenses.
Once you secure your line of credit, you will need to pay back the amount you draw on (plus interest) within a predetermined repayment period. You could also pay back the amount immediately to save on interest.
A line of credit is often preferable to a standard business credit card because you can transfer money from your line of credit directly into your bank account. With a credit card, a cash advance will likely come with hefty fees. Plus, credit cards tend to have higher APRs and shorter repayment terms.
Choose and Use a Business Line of Credit
A business line of credit is a convenient and cost-effective way to manage cash flow and increase financial flexibility. With it, you can take advantage of the following benefits:
Quick access: When you’re in a pinch and you realize you need working capital, the ability to hop on a computer and initiate a loan from your available funds is priceless. Business owners can access the funds they need in a matter of minutes.
Flexible amount: Unlike a term loan, where a borrower needs to take out a single, pre-determined amount of cash, a line of credit can be used in more flexible manner. You repay as you use the funds, and only pay interest on funds drawn.
Planned use: With a line of credit, you can cover any expenses you know you’ll need help with ahead of time. Having a line of credit to draw from can help with solving budget issues. It’s a great short-term solution for different things such as marketing, renovations, buying inventory or even covering payroll.
Unexpected use: While having an LOC for planned expenses is a plus, we know the real value is having an extra financial cushion in the event of unpredictable expenses. Since you are not required to use the entire amount you are approved for, the rest of those funds are sitting there ready for you when you need them.
In-between costs: LOCs are great for covering those in-between amounts, seasonal costs, and months of slower production.
Fund control: A business line of credit provides you with the flexibility to utilize funds however you wish. Whether it’s ongoing operating costs, to cover gaps in cash flow, or take advantage of unforeseen opportunities or challenges. You don’t need to have a specific use case outlined to secure the cash.
Credit boost: If you’re looking to improve your business’s credit score, a line of credit can help you do so. Making your payments on-time reflects positively on your score and can help you receive a larger line of credit in the future.
Affordable options: A line of credit typically has a lower interest rate than short-term loans of comparable size. Of course, rates and terms vary depending on your credit score, annual revenue, and other financial factors.
Easy approval: Unlike traditional loans, which require a thorough review process and typically have stricter criteria for approval, lines of credit are often easier to obtain.
Financial freedom: A line of credit can be used over and over again. You can get approved for funds before you need them, and they don’t have to serve one specific purpose.
Leveraging Your Business Line of Credit for Maximum Growth
A line of credit is a great financial tool for managing cash flow, providing quick access to funds when needed. You’ll want to use it to put your business in the best possible position for the future. Here are a few best practices to keep in mind when using a line of credit:
Plan ahead: While it may seem counterintuitive to apply for a line of credit before it is actually needed, there are several advantages to doing so. Taking the time to research different lending options and compare rates up front can save a significant amount of time and money down the road. Additionally, having a line of credit already in place can help to provide peace of mind in case of emergency or if an additional cash flow is needed for future business expansions.
Limit overuse: Using an open line of credit for purchases can provide convenient access to the funds needed, however, it is important to ensure it is used in the right way for the right type of purchase. Not all purchases are appropriate for an open LOC and overusing it could lead to financial difficulties. LOCs are intended for short-term loans lasting just a few days or weeks—not years.
Keep it revolving: A business owner can’t use an LOC when they need it most if it’s not available. You need to keep in mind that a line of credit is not intended to carry a balance for any length of time. They’re best used for short-term funding that can be paid off quickly, allowing the line of credit to remain open most of the time for emergency use.
Adjust payments: Making smaller payments during the off-season or slow months and larger ones when revenue is flowing is an excellent way for businesses to keep more cash on hand. This will avoid dipping below the minimum payment requirement which ensures that you’ve got enough money available for what matters most.
Your Business, Your LOC
A business line of credit can be a lifesaver for any company, from large retailers to small neighborhood mom-and-pop stores. With an LOC, businesses can access funds as needed when cash flow levels dip or seasonal demands increase – allowing them to take advantage of opportunities and manage their day-to-day operations with more flexibility. A line of credit is an ideal solution for financing business expenses while increasing working capital.