As a business owner, you know that many factors affect your cash flow and working capital. When your company is experiencing seasonal revenue differences or waiting for clients to pay their accounts, you sometimes need access to additional funds to meet your financial obligations. Business lines of credit enable you to stabilize your cash flow and prevent potentially disastrous outcomes.
How Do Credit Lines Work?
Getting this form of financial aid for your company is similar to obtaining a business credit card. A lender provides you with a predetermined amount of money to draw from as necessary. You choose how you use the funds. You pay back the borrowed amounts with interest, typically monthly. Once repaid, you gain access to the money again for future use. This revolving funding differs from the allocation of lump sums given by traditional bank loans.
What Do You Need to Know?
Before financing your expenses with a line of credit, ensure you understand how they work and what purposes they serve best. Consider the following points:
- Banks may require assets to secure the funding if your business is brand new.
- Lenders need to see various financial documents before approving your loan.
- Financial institutions often ask for a written business plan before granting credit.
- Business credit lines are not for significant expenditures, such as purchasing costly equipment or systems.
- This borrowing method can boost your credit. However, depending on your usage and repayment rates, it can also negatively affect your scores.
Will You Require Collateral?
Your collateral needs depend on the type of credit line you obtain. An unsecured line of credit does not necessitate assets to back the loan but commonly has higher interest rates and lower credit limits than other finance options. Lenders offering this type of funding have strict qualifications for approval. You will need proof of revenue, professional history and good business and personal credit scores.
With a secured credit line, you must use your assets to back the finance amount. Due to the short-term nature of lines of credit, you can typically use your company’s accounts receivable or inventory as collateral.
How Can a Credit Line Benefit Your Business?
By securing a credit line, you can handle challenges affecting your cash flow’s stability, such as seasonal business changes or unexpected building or equipment repairs. Consider some of the ways to utilize business lines of credit:
- Maintaining consistent marketing
- Taking advantage of new business opportunities
- Meeting payroll expenses when income is low
- Hiring new employees during rapid growth periods
- Keeping your inventory stocked
Your company needs consistent working capital to operate efficiently. When circumstances affect your revenue, a line of credit can help cover short-term expenses.