When it comes to running a business, having a stable cash inflow will ensure smooth business operations. Due to this, many companies choose to apply for a business line of credit to get proper financing for their business expenses. This is similar to owning a credit card, in that you can use it whenever needed unless you don’t exceed the limit.
As a business owner, you may face circumstances where you will be short of capital to finance all the operating expenses, including general and administrative, payroll, etc. When the working capital is tight, the business operations do not go as smoothly as they used to, and that is when business people seek external financing.
For you to figure out whether or not a business line of credit is the right way for your business financing, you can do your research at various online platforms where experts will help you make the right choice. One of the online platforms you can explore is Lendzi, which will help you avoid poor decision-making in business operations. Now, let’s take a closer look and see how exactly a business line of credit may help and grow your business.
Improved business adaptability
Let’s take into account a manufacturing business the suppliers of which significantly reduced raw material costs. That would be an excellent opportunity for your business to boost its inventory and decrease the cost of sales.
However, the problem is that you may not have enough money to enjoy that opportunity. By getting a business line of credit, you will be able to take advantage of that opportunity and save money in the long run!
Better control of business capital
Unlike traditional commercial loans, which provide a sum of money immediately, the line of credit allows your business to use those funds wisely. In other words, when you quickly receive a lump sum of money, you are less likely to make smart financial decisions and spend those funds on unnecessary costs. In contrast, a line of credit allows you to pay only for what you used. That said, you will have to make interest repayments on the amount used.
A bank or financial institution will give your business access to approved funds, and once you accomplish the repayments, you will have access to this capital again. In other words, it allows you to use the money and prosper your business gradually. You have all the rights to make growth-based decisions and satisfy operational business needs.
As lines of credit provide you with the capital you need, you will have better control of your business finances and management.
Builds your business credit
Another positive aspect of this type of credit is that it will help with your credit score. Maintaining a business line of credit will help you build a credit rating and help you get favorable terms on future financing.
Just like in the case of personal loans, where you need to have a higher score for lower interest rates, business lines of credit rates also depend on this factor. If your business is relatively new and the business line of credit is its first loan, be ready that the prices are going to be higher.
However, applying to this type of commercial loan, you will be able to build a credit score and have a lower business line of credit rates (or other commercial loan rates) on your next application.
Helps during the slow season
For many businesses, the business line of credit is an excellent tool for balancing cash flow. Although this may not apply to all businesses, it is especially true in the seasonal ones. For example, consider a retail store selling swimsuits and beach accessories that earn most of its income during the hot summer. It may run short during other seasons, making it more challenging to cover payroll and additional administrative costs.
As you can not use a simple credit card to pay out your employees’ wages, a small business line may be an excellent solution for such types of businesses.
Investment in property and equipment
A line of credit provides easy access to cash for purchasing property, plant, and equipment for your business. However, keep in mind that the business line of credits is best for smaller equipment and inventory purchases.
Although there are no specific business credit line requirements on what to spend the financing on, you should consider that the interest rates are not fixed and can fluctuate with market volatility and repayment history.
So, before making a considerable investment, you can calculate your future cash flows by using a business line of credit calculator and gain a picture of whether your business will be able to pay off the investment.
What else you need to know
Based on the reasons mentioned above, a business line of credit may help your business grow and improve your operations. But it would help if you were careful in the research stage. Is the business line of credit what your company needs?
To qualify for a business line of credit, the lender will need financial statements of your company’s historical performance, bank account confirmation, tax returns, and other documents to make sure your business is qualified for such credit.
There are some business line of credit requirements. So, if you are new to the market, it is less likely you will qualify for this loan as a bank will most often require a minimum of two years of operation. But don’t lose hope! The current financial market is developed so that it can satisfy all of the clients’ needs.
All in all, the business line of credit allows business people to get financing quickly and inexpensively. You get access to a certain amount of money and pay interest only on the used amount.
Keep in mind that this type of loans usually have variable interest rates. Therefore it would be a better consideration to calculate your future cash flows beforehand. Although it is an excellent tool for financing new equipment or boosting inventory, make sure you do not have a significant amount of outstanding interest repayment.
Other than that, it may be useful for small businesses that are volatile to seasonal changes. It will ensure cash flow stability and prevent from incurring additional costs.
About MARK B
I have nothing but good things to say about CashOne's team. They have helped me in such critical situations when I felt suffocated.More articles by MARK B