Get Help with a Business Line of Credit

Every small business experiences cash flow challenges. Since cash flow fluctuations are a natural part of doing business, rather than avoiding them, another approach is to actively manage your cash flow. Read on to learn about how a line of credit is an important tool for cash flow management.

A line of credit is a given amount of money you can borrow when you need it and repay back when you do not. It is different from a loan because you do not need to use it, but you can if you need a fallback option if you have unexpected cash flow issues brought about by any unplanned expenses, seasonal cycles, or late paying customers. A line of credit can also be a great way to start building your business credit score.

Who Should Use a Line of Credit?

A line of credit can help many businesses off the ground and a loan can quickly eat your profits. It is also good for businesses who are up and running because it offers a safety net for them as well as great flexibility that business owners can use creatively to their advantage. Some business owners will offer their customers and supplier better payment terms to gain a competitive advantage or others may buy inventory when it is cheaper or invest in advertising to attract more customers.

Do your research and choose the right solution for your business. Once you go through the approval process, you can choose the best time to utilize your credit line and repay it when you do not need it anymore. Since the organization that is offering the credit line is basically putting money aside for you, some financing providers charge you a fee just for the right to use the credit line even if you did not use any of the funds.

How a Line of Credit Differs from a Business Loan

A line of credit can be used multiple times, but the major difference is that business loan is drawn one time for a specific purpose. Business loans are usually used to borrow higher amounts and for one-time purposes, such as buying out a competitor.

Credit lines are used for day-to-day activities. Also, loan repayments are fixed and paid on a monthly basis while a credit line can be repaid at any point in time. Closing costs are higher for loans but the maintenance fees for credit lines might be higher due to the flexibility in repayment terms.

How to apply for small business line of credit

The first step is that you need to do your research and find the solution that best suits your business needs. Then, make sure you are taking steps to show that you are serious about your business. Write a business plan if you are still in the startup phase.it will demonstrate to lenders how you will generate the revenue needed to make your repayments.

Also, keep an eye out on your personal credit score. If your business is new, it might not have a credit score which means the bank will look at your personal credit score instead. Getting approved for a line of credit will be tricky if your score is low and result in a higher interest rate.

Lines of credit can come from other alternatives such as a business credit card or an alternative credit line provider.

Interest Rates

While business loans seem to have higher interest rates, a business line of credit has fees such as those you pay to keep the line available even if you do not use it. The seemingly lower interest rates of a credit line might still result you in paying some more. Credit lines provide an amount of flexibility that many other solutions do not.

What You Need to Secure a Line of Credit

The requirements for securing credit lines vary among financing providers but the one thing they all have in common is that they look at your ability to repay in order to make their decision. Banks and lenders want to see that you are cash flow positive and profitable, which is why it is preferable to secure a line of credit before you need it.

The best ways to use a line of credit include short-term financial needs or to cover payroll during a slow period. Just be careful and do not overuse your line of credit.

The Bottom Line

Make sure you find the right credit line provider that will understand your business and your needs, take an interest, and be familiar with the small business environment. They should be able to recognize the challenges that small businesses face such as seasonal ones or slow paying customers.