Don’t Run out of Cash: Get Help With a Business Line of Credit

Every small business experiences cash flow challenges. Cash flow fluctuations are a natural part of doing business. Instead of trying to avoid them, it is better to actively manage your cash flow. In this article, we will discuss an important tool for cash flow management—the line of credit.

What is a credit line?

A line of credit is an amount of money you can borrow when you need it, and repay when you don’t. It is different from a loan because you don’t have to use it. You can use it as a buffer or fallback option if you have unexpected cash flow issues caused by late paying clients, unplanned expenses, or seasonal cycles. It can also help build or bolster your business credit score.

Who is it for?

“For businesses that are already on their feet, a credit line offers a safety net.”

For startups, a line of credit can help get your business off the ground. New businesses often have limited capital needs, and a loan can quickly eat into profits. For businesses that are already established, a credit line provides a safety net and flexibility that business owners can use to their advantage. They can offer customers and suppliers better payment terms, buy inventory when it’s cheaper, or invest in advertising to attract more customers. Like any other financing solution, credit lines come in different varieties, each with its own advantages and disadvantages.

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Choose the right solution for your business. There isn’t a one-size-fits-all solution. A credit line’s most important advantage is that you pay interest only on the money you actually use. This gives you the flexibility to invest when you want and meet financial obligations when needed.

Once you go through the approval process, you can choose the best time to utilize your credit line. Repay it when you don’t need it anymore to avoid unnecessary fees. However, since the organization offering the credit line is putting money aside for you, some financing providers may charge a fee for the right to use it, even if you didn’t actually use the funds. Others will charge you only when you draw the money, but these fees might be higher.

How is a line of credit different from a business loan?

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

Credit lines are often used for day-to-day activities. Another difference is that loan repayments are fixed and paid monthly, while a credit line can be repaid at any point. If your balance is zero, your payment is zero. Closing costs are typically higher for loans, but maintenance fees for credit lines might be higher because of the flexibility in repayment terms.

How to apply for a small business line of credit:

First, research and find the solution that best suits your business needs. Then, take steps to demonstrate that you’re serious about your business. If you are in startup mode, write a business plan. This will demonstrate to lenders how you will generate the revenue needed to make your repayments.

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“Writing a business plan will demonstrate to lenders how you will generate the revenue needed to make your repayments.”

Keep an eye on your personal credit score, especially if your business is new. If your business doesn’t have a credit score, your bank will look to your personal credit score instead. If your score is low, getting approval for a line of credit could get tricky or result in a higher interest rate.

Lines of credit can come from sources other than banks. If your cash flow issues can be managed with a small injection of cash, talk to your bank about getting a business credit card instead, or try one of the growing number of alternative credit line providers.

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