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Home Blog What You Need to Know About a Business Line of Credit
In the small business world, it’s possible to make money and still run out of cash. A business line of credit keeps the pump primed so you won’t be as vulnerable 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 future sales. It’s also why lines of credit are so popular.
“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.”
“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.”
Some loans are for specific purposes, like startup loans, equipment financing, and commercial mortgages. But a business line of credit is more opportunistic than that. Rather than using it to run or build your business, you’d use a line of credit to cover the unpredictable costs like equipment breakdown or cost increases due to inflation or for last-minute travel to close a new piece of business.
A business line of credit simplifies your life because it’s a revolving form of credit. This means that instead of borrowing a lump sum of money from the lender, you get access to a set amount of money that you can dip into, repay, and access again.
So, let’s say you own a small physician’s clinic and your MRI machine stops working. Rather than borrow $100K to buy a new one, you may choose to take $25K from your line of credit to fund repairs and get it back up and working.
Or maybe you own a lawn maintenance company and you live off your line of credit in the winter? In that case, you’d use the summer proceeds to live and pay off what you racked up off season.
Or maybe as the owner of a marketing agency, you’d dip into your line of credit to fund the creation of a big pitch and the cost of sending your team to present in Sweden.
Whatever the reason is, one of the biggest benefits to a line of credit is that you only pay interest on what you spend versus the entire amount you’re approved for.
For example, if you were approved for a $50,000 term loan with an interest rate of 8%, you’d owe that much interest on the full amount for the entire life of the loan.
If you were approved for a business line of credit of $50,000 but only spent half, you’d pay interest on $25,000.
Sound familiar? It should because it’s the same as a credit card. And like a credit card, a business line of credit acts as a safety net or instant financing on tap.
Always pay attention to a business line of credit’s limit and interest rate, as well as your ability to consistently make payments on the amount you borrow. If these elements are in harmony, your line of credit will be one of the most stress-free forms of financing available.
At the end of each billing cycle, you’ll have the option of either paying your full balance or making a smaller payment and carrying over the remainder into future billing periods.
If you opt for a carryover, you’ll owe interest on that amount. Paying down your line of credit quickly means you’ll ultimately pay less in interest — and you’ll be able to dip into that credit again when needed.
How is a line of credit different than a business credit card? First, interest rates tend to be lower with a business line of credit. You’ll notice the difference whenever you don’t pay the balance in full. Second, flexibility. With a business line of credit, you can move money out of your line of credit and into any account you want. With a business credit card, use of the funds is usually limited to anything you can pay for with a credit card.
Start with a business plan that identifies exactly how much money you’ll need. Once you’ve settled on this amount, there’s a natural weeding out that occurs because some of the options might not be able to deliver what you require.
Start with the simple online application at Lendio. After you provide basic information about your business and borrowing needs, you’ll be presented with financing options that are available to you. While you’ll only need to provide your business name, personal and ownership details and 3 months of bank statements to complete this initial application, it never hurts to have more details, too. Why? Says The Balance Small Business, “Until you have a good business plan, chances are you won’t even know how much money you need or how fast you can repay it.”
Once you’re presented with options, work with your Lendio funding manager to find the one that’s right for your business. Ask questions. Compare options. Review terms, including interest rates and repayment. Determine what’s most important to you and let your funding manager know so they can help you narrow down your options and get exactly the line of credit or other financing that you need.
Having the safety net of a business line of credit will give you the flexibility to buy what you need, when you need it.
Interesting in finding out what your small business could borrow? Get started with Lendio’s online, 15-minute application.
Gina Fusco is a writer, editor, and business owner, who started Re:word Content Co. at her kitchen table in 2009.