Lines of Credit: When To Use Them

If you have a startup, There’s a very good chance that you will need financing of some kind, unless you are very lucky. There are several options out there, and you will need to decide which ones are most appropriate for your business. You could get financing for equipment or inventory, or you could get a merchant cash advance, for example. In terms of straight financial loans, you could get a loan through the small business administration of the federal government, or you could get a loan from a financial institution. 

One of the options is to get a business line of credit. A business line of credit is like a loan, but there are slight differences that you might find attractive. Very often a line of credit can be used in conjunction with other financing options as part of a broad capital collection strategy. 

You can think of a line of credit as being similar to a credit card. There is a credit limit involved, and you cannot access funds beyond that limit. It is not used for specific purchases like a credit card, but you can get funds instead. You will only need to pay interest for the funds that you use, where with a term loan you start paying interest on the entire amount right up front.  

Two Types of Business Lines of Credit

There are two types of lines of credit for which you can apply. One is a revolving, and the other is a non-revolving line of credit. A revolving line of credit will never close, unless you choose to have it closed. You can use up to the limit, pay it back, and then use that amount that you’ve paid down. Because of this aspect, you can keep a revolving line of credit for a long period of time, and use it as you need to. 

 A non-revolving line of credit does not stay open after you have used it up to the limit. Once you’ve reached that level, a non-revolving line of credit is closed, and you can no longer access the funds. At this point, you will be making payments to pay down the amount, but you cannot use the amount that you’ve paid off. 

Benefits Of A Line Of Credit

For many businesses, they appreciate that they only have to pay interest on the funds that they use, and not the entire limit. That way they can be selective in how they use a line of credit, and tend to make smarter decisions when compared to using a term loan. It also helps you build up credit for your business in a low-risk way. Your payments will depend on how much you’ve spent, so they do not have to be very high. If you are good at making them, then your credit will get better and better. 

There are some things you need to consider if you are considering a line of credit, however. There may be fees associated with your line of credit, depending on the lender. Do your research to find a good rate for you. A line of credit can be difficult to qualify for as well, so you will need to have your ducks in a row before you do. Finally, there is a chance of misuse if it is not monitored carefully. Businesses will sometimes spend too much on their line of credit and find that they have a hard time paying it back. 

When To Use Your Line Of Credit

There are several scenarios when using a business line of credit is a perfect option for your business. For example, some businesses go through slow or seasonal periods where they do not have revenue coming in. A line of credit will provide the funds they need to pay for bills and salaries until the busy period starts up again. This helps businesses keep the lights on and retain staff even when revenue might not support it. 

A line of credit can also help your business be more flexible and adaptable. You often can’t control when an opportunity comes around that would be beneficial to take advantage of. With a line of credit, you will have the ability to strike when the iron is hot, even if you don’t have the cash on hand. For example, a vendor may offer you a discount if you buy in larger amounts than you usually do. You can use the line of credit to make the purchase and get the savings. 

There may also be times when you just need a quick infusion of cash for any number of reasons. It could be an emergency, or it could be that your business has suffered damage from something that isn’t covered by your insurance policy. No matter what, taking on debt always carries some risk. However, it is often necessary to make sure that you have the cash you need on hand to run your business. There are many options for financing, and a line of credit is just one of them. Do your research and choose the best choice for your business.

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