Your business might be booming, but that doesn’t mean you’re not going to see fluctuations. In fact, most businesses go through a business cycle with seasonal ups and downs. Because of these possible sudden changes, you’re going to want to have a line of credit, because it’s going to carry you and protect you through those rough patches.
What exactly is a line of credit?
A line of credit is a flexible loan given by banks or financial institutions. It gives business owners access to a specified amount of money that can be used as needed. Later on this money will be repaid, with interest and according to the agreed payment schedule.
Why exactly do you need a line of credit?
Cash is the most liquid asset and that’s why it’s crucial to have cash on hand for unforeseen situations, such as a sudden expense or to overcome any dips in your business’s monthly revenue. Sometimes when your business needs cash, it’s not available, maybe because someone hasn’t paid you yet. In situations like these a business line of credit comes in handy, as it allows business owners to overcome these short-term problems.
Usually a business line of credit is used to pay for working capital needs, or to make inventory purchases and so on. Honestly, opportunities can come really fast, and you’re going to want to make sure you have the cash available to take advantage of it.
Advantages of a line of credit
A line of credit can be way cheaper when compared to other options, as interest is only charged on the amount that is used. For example, if your line of credit is 100,000 dollars and you use only 50,000 dollars from it, then the interest will only be charged against the 50,000 dollars you used and not the entire line of credit that was available to you.
In addition to that, once your line of credit is approved, the funds can be acquired whenever the need arises. But since banks need to approve a line of credit first, it is always better to ask for approval when your business is doing well, it’s going to be a lot easier for you to obtain it. After approval this money can be used whenever you find your business short of cash.
So as you can see, a business line of credit is a great option and it will come in handy, especially during the seasonal ups and downs. Having said that, it is important to note that a line of credit is there only to smooth over short-term problems. As with any financial decision, be responsible. Don’t look at it as a solution for any long-term financial crisis your business might be facing. Don’t max out your line of credit and carry that balance, as that could only make the problem worse. But other than that, having a business line of credit is a great option, as it’s always better to be safe than sorry.
If you want to find out what options you have for a line of credit, talk to one of our loan specialists at Lendio.