As a business owner, you need immediate access to capital for a number of reasons. Read on to understand why having a business line of credit is essential.
Struggling with reliable cash flow for your business? Well, you are not alone. Equipment becomes more expensive, customers don’t pay on time, and sales slow down. Every business requires cash on hand to handle sudden challenges and keep bankruptcy risks at bay.
To make sure you never find yourself short on cash, it’s important to have a way to access capital right away. That’s where a business line of credit comes into the picture.
What is a business line of credit?
A business line of credit is a versatile form of financing that businesses can access as needed. A line of credit is revolving, meaning you can easily tap into it repeatedly (as long as you haven’t reached your credit limit).
Once your line of credit is secured, you must repay the amount you drew (plus interest) within a predetermined payment time. Plus, you could pay the amount back right away to save on interest.
A business line of credit is often very similar to a business credit card. The only difference is that you can transfer money from your line of credit directly to your bank account. Meanwhile, a credit card that comes with a cash advance will likely have high costs.
Keep in mind that credit cards tend to have higher APRs and shorter payment terms.
Benefits of a Business Line of Credit
There are certain benefits that come with opening a business line of credit over traditional types of financing. These benefits are as follows:
- Easier approval
Financial institutions often accept people with bad credit (remember: their terms and rates may not be good). That makes a line of credit a reliable option when you can’t get a traditional loan.
Plus, it’s a great way to boost your credit score, especially if used responsibly.
A line of credit often carries a lower interest rate than short-term loans of comparable size. In fact, terms and rates differ based on your credit score, annual income, and other important financial factors.
Compared to a term loan, where you take out a lump sum of money and make regular payments, a line of credit can be used on an as-needed basis. You pay as you use the funds and pay interest on withdrawn funds. Simple as that.
With a business line of credit, you can use the funds however you see fit: to cover gaps in cash flow, for ongoing operating costs, or to take advantage of unforeseen opportunities or challenges.
On top of that, you don’t need to have a particular use case outlined to secure the money.
- Establish business credit
Businesses like yours should generate scores with their major business credit reporting agency. Using a revolving business line of credit allows you to establish a positive payment history that shows up on your company’s business credit report.
That will possibly allow you to obtain future credit for your business based on the creditworthiness of your company.
- Business and personal separation.
One of the problems most business owners face is keeping business and personal expenses totally separate. The advantage of a revolving business line of credit is that it allows you to streamline and control your business expenses because your line of credit is solely committed to your business. How cool is that?
- Find lower interest rates
Particularly when you’re just starting a new business, finding a reasonable interest rate is important to all business owners. Business lines of credit tend to carry lower interest rates because they are not interest rate driven compared to loans. However, those rates are more likely to be variable at the same time.
Depending on the line of credit, your creditworthiness could be a key factor in determining eligibility. Simply put, the higher your credit score, the better terms you’ll get.
If you’re worried you won’t get approved for credit, feel free to shop around for loans that take into account your annual income more than credit.
Business Credit Card vs. Business Line of Credit
Trade credit is considered a line of credit. So why choose one over the other?
If you want cash like paying contractors for a remodeling job, a line of credit can be a great option. What’s more, if you need tens or hundreds of dollars, a credit card won’t let you charge as much.
In the meantime, if you want to buy equipment or supplies in stores and online, a business credit card may be a good option. Keep in mind that credit cards are likely to have higher interest rates, although others have great welcome rates of 0% interest. You would like to pay your balance in full to avoid high charges.
When is a business line of credit a great idea?
Every business must remain agile. Conditions change. The opportunities come. Cash flow zigzags and then zags. When you need access to cash for unexpected events or to finance ongoing expenses like inventory, a business line of credit could be the ideal answer.
- · Prepare for the unexpected
Cash reserves are crucial to weather the unforeseen, such as the coronavirus pandemic, or to cover expenses during cyclical changes. You might consider applying for a business line of credit to have on hand when other short-term needs arise or to serve as an emergency fund.
Keep in mind that cash keeps a business growing, but other seasonal businesses often have patterns in their cash flow throughout the year. If you need additional capital to see you through tough times, a business line of credit can offer a vital source of working capital.
Business credit cards are the most dominant financial tool for expenses of around $15,000. On top of that, business decision makers are beginning to consider other financing options, such as business lines of credit.
Is your business looking for a way to finance long-term or smaller expenses with the flexibility to pay over a longer period or at a low interest rate?
You may want to consider a business line of credit that allows you to expand when needed and look for growth opportunities when they present themselves.
- · Regular and irregular inventory needs
Some companies are already stocking up on inventory, and supply chains are still dealing with the fallout from the pandemic and lead times are slightly longer. Even during normal periods, it can be challenging to pay for inventory with revenue alone.
Let’s say your inventory turns over quickly. A flexible business line of credit can be the perfect form of financing.
With the economy recovering from the crisis, many businesses are noticing opportunities to grow and require short-term business loans to hit a new stride. A business line of credit can increase the purchasing power of your business to finance growth and make it simpler to invest in the things that will support future income.
Are you seeing these scenarios?
A business line of credit is one of many financial tools you can leverage to establish a strong and growing business. Still, expenses can be hard to anticipate when they grow quickly.
For smaller everyday expenses, a business credit card that earns cash or points might be the way to go. However, for a more personalized breakdown, speak with a GoKapital business expert today who will help you understand the financing options that are best suited for your business.
GoKapital is a private lender that offers business loans and real estate financing. We hope you find this article informative and useful. Contact us today to get started!