When it comes to running a business, you’ll never know when revenues are up or down. It will take a lot of tactics to stay ahead, but you also need to have a back-up plan when cash flow is tight. Besides all the other types of business loans we have mentioned, a line of credit is another option that can help you run daily operations, pay staff, create fitouts, and other essential matters in business.
A business line of credit allows entrepreneurs to get funds quickly and inexpensively. You can get access to a certain amount of money, and only pay interest on what you actually use. Also known as revolving credit, it’s designed for small business owners to obtain a sufficient cash flow for running and growing a business. It’s similar to a business credit card or personal line of credit, but for business owners to tap into with the perks that come along with it.
Here are the benefits that come with getting a line of credit. If you want to check out how a line of credit can work for you, start by getting a quote here.
- Quick Access to Funds
If you need easy access and flexibility to fund your business, this option of business credit may be the one you’re looking for. A line of credit can be unsecured up to a certain amount by lenders, which means that you don’t have to put up a collateral. It can also be secured by a business or personal asset.
You’re also free to use the funds in whatever way you want from a line of credit. It gives you the flexibility to put the money when and where it is needed the most. Some business loan applications would require you to be specific as to where you’ll use the money. With a line of credit, you can use the money for whatever purpose without being strict as to where you should use it.
The flexibility in using and repaying funds gives you room to implement business strategies You don’t have to worry about cash flow because a line of credit can give you immediate financing. In a way, it can influence you to make better decisions because capital is given for your business to grow.
2. Better Control of Your Business Capital
Unlike traditional loans which provide you with a lump sum of money, a line of credit allows you to get just the right amount of funds needed at the moment. You have control over how much money you’ll take and when you’ll get it. You will only pay interest on the amount used.
A lender will offer you a certain amount of capital for an unspecified period. As you accomplish the repayments, you get access to those funds again. This ability to continually obtain funds helps grow your business. You have the freedom to make growth-based decisions, while turning that capital into income-generating opportunities.
Getting a business line of credit also helps you stay on top of everything. It avoids the tendency of you relying on investors, and those investors ultimately controlling your business. As lines of credit offer the capital you need, you’ll have better control over your company’s finances and management. Even if investors will come in at some point, you’ll have the upper hand on your business at the start if you rely on a line of credit.
To top it all off, what makes a business line of credit incredibly powerful is that you have the opportunity to get capital when there’s a window of opportunity for growth. You can’t just wait for your cash flow to come in for you to finance a venture. A line of credit can give you the capital needed now and repay it when conditions are favourable to you.
3. Lower Interest Rates
Lines of credit in the market nowadays usually follow a prime lending rate, which doesn’t fluctuate over time. It is also much lower than the interest rates charged by credit cards.
As long as you always pay on time, interest rates in lines of credit will stay low for you to get more access to funds. Paying promptly will also give you cheaper access to capital and higher credit limits. On the worst case scenario when you miss payments, interest rates will go up, debt will accumulate, and you’ll get limited access to funds. However, maintaining a line of credit is your back up when you need to pay for contingencies in running your business.
4. Cash Flow During Slow Seasons
A business line of credit will come incredibly useful when profits are low at this time. You’ll get the funds needed to continue running a business, even if sales are not that good for this month. It evens out the cash flow during the lean months, thus keeping your business afloat.
For example, you might have strong sales during the holiday season, but sales start to slow down after 2 weeks. You can tap into a business line of credit to maintain operations, buy new stocks, or pay your staff on time.
When cash flow is limited, a line of credit will also prevent you in asking for money from family or friends. It gives you the responsibility of having cash on your own, and not be in debt to the people close to you.
A business line of credit will also help you tap into a source of funds quickly, especially for short-term needs in business. You don’t want to stop a project short because you’re low on funds. You also don’t have to scramble for money when it’s time to pay contractors, repair broken equipment, or inject capital to make up for clients who pay late. Having a line of credit helps you stay ahead without stopping due to finances.
Another key advantage of lines of credit is that they have more flexible repayment options. You can pay a bigger part of the balance when cash flow is good, and pay off the minimum required when profits are slow.
5. Helps Improve Your Credit Score
One of the factors that make business owners unable to get funding is due to bad credit or no credit. Here’s where getting a line of credit comes in a beneficial way. Lines of credit help you establish a positive credit history, so that you can apply for bigger financing in the future. It also gives you the opportunity to raise your profile as a reliable borrower. Lenders and investors will eventually see you as someone they can entrust capital to. With a line of credit, you can continually build yourself up as a business owner, improve business finances, and drive the growth of your company.
Whether you have a good or bad credit score, you can still get a loan from lines of credit. However, if you have a not-so impressive credit score, lenders will charge higher interest rates to mitigate their risk. Take this opportunity to build up a good credit score so that interest rates will be given in more agreeable terms. As you build up good credit, and be prompt in your credit repayments, you’ll be able to access lines of credit without much fuss.
Drawbacks That Come With a Business Line of Credit
Unlike traditional bank loans, the costs involved in maintaining a line of credit can be high. It may require up-front fees on top of high interest rates. Repaying the debt can also be difficult when finances are tight. The worst case scenario is when a business fails and there’s still a line of credit that needs to be repaid. It will also depend if you’re a sole proprietor or part of a corporation. A sole proprietor will be liable, but a corporation may relieve you from the financial obligation.
Compared to other types of loans, lines of credit also have lower borrowing limits. You can fund short-term needs with lines of credit, but for other long-term needs in business expansion, you’ll have to go for other options that give you a bigger capital.
Everything has drawbacks, but this should not steer you away from making the most out of this financing solution. Create a spreadsheet where you’ll take note of how much you’ll get from a line of credit, and how much you should repay every month. Make a projection as to your income growth every month, and how you can cover the repayments with it.
How to Improve Your Qualifications for a Business Line of Credit
Lines of credit are still a must-have for business owners. At some point in business, you’ll have to get access to funds for unexpected expenses, support cash flow, and future growth. It is, therefore, important that you build up your business finances, credit history, and revenues to push your venture even further. Here’s how you can grow your business alongside being eligible for a business line of credit:
- Prepare Your Documents
Applying for a business line of credit usually requires financial statements, tax returns for business and personal purposes, bank account information, and other business documents. You may have to undergo an annual review to maintain your line of credit.
- Business History
It’s best that you have already been running your business for two years and have a substantial annual turnover to be eligible for a line of credit. The lender will also have to ask questions about your business. If you have a good credit history, you may be eligible for lines of credit with lower interest rates.
Among these common instances, there are other types of financing that has lesser requirements and come with a quicker application process. Get to know about these options here.
How to Make a Business Line of Credit Work for You
Securing a business line of credit really does come with its perks, but do remember to manage this source of funds wisely. You cannot overindulge when you get the money offered by a line of credit. It will become difficult for you if your expenses go overboard and you can’t follow through with the credit repayments. As long as you use it carefully and strategically, you can fund your short-term business needs and grow your venture without much of a problem.
It is advisable that you use this credit option for short-term needs that can be covered by future cash flow. If you use it for long-term investments, it might be difficult to catch up on repayments. Set clear rules as to how you’ll use the line of credit in business. Create projections as to how you can make the most out the credit, and then repay the loan with the income generated from those funds.
If you’re looking for a business line of credit in the UK, check out our smart software which gives you access to an incredible pool of financing options. Getting a small business loan in NZ gets easier as we connect you to a network of lenders and funding solutions. Start getting better financing solutions by comparing small business loans just click the button below.