What You Need to Know About a Business Line of Credit

Dec 20, 2019

What You Need to Know About a Business Line of Credit

Every small business owner is keenly aware of the major expenses associated with starting a company and keeping it in operation. Whether it’s machinery for a construction company, ovens for a restaurant, inventory for a retail store, or vehicles for a transportation company, these purchases often require substantial financing.

In these scenarios, heavyweight loans such as equipment financing or business term loans can provide the money to make the purchases possible. Both of these loan options have maximum amounts in the millions of dollars, so the sky’s the limit.

On the other hand, scores of smaller purchases are just as important to your business’s ability to keep chugging along. These expenses may ebb and flow throughout the year, making it difficult to maintain constant cash flow. For recurring and one-time expenses such as these, a business line of credit can be an enticing option.

“Entrepreneurs frequently encounter difficulties managing their cash flow as a result of seasonal credit demands and time gaps between capital needs and revenue realization,” explains The Balance Small Business. “This is especially true of business startups during their early stages of development when they have not diversified enough to generate a constant positive cash flow. Once the inventory has been purchased, it is necessary to ride out the cycle until accounts receivable have been collected. Without sufficient working capital, a serious cash flow problem could develop.”

In the small business world, it’s always possible to make money and still run out of cash. A line of credit keeps the pump primed so you won’t be as susceptible to seasonal ebbs and flows and other factors out of your control. The easy access to capital allows you to buy the necessary inventory, equipment, or whatever else so you can set yourself up for forthcoming sales.

“If your business has a low season and a high season, you may consider spending on credit during the low season to push through to the high season,” says USA Today. “If it takes some time to collect payments from customers after sending out invoices, a line of credit can help you cover any gaps.”

About the Author

Grant Olsen

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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