A business line of credit is a type of borrowing that offers more flexibility than a traditional business loan. It is a pool of money available for you to dip into as needed. You only pay interest on the money you use, rather than the total amount for which you are approved, potentially saving you from unnecessary interest and fees.
As opposed to a business loan, you do not have to take the money in one lump sum. In this way, a line of credit is like a credit card where you are approved to borrow up to a predetermined amount, but are not required to use it all.
Because a line of credit is revolving, you have the option borrow the funds when and if needed. You can pay back and re-borrow the same money multiple times. If your business’s cash flow is steady, you could pay off the line of credit at the end of every month, leaving the full amount to cover any gaps the following month.
There are a variety of reasons you may choose to open a business line of credit with your lender.
You can use the money for any business need
While most business loans have restrictions on what the funds can be used for, this is not true of a business line of credit. Any time that cash flow is a problem for your business, a line of credit can help cover the gap. You can use these funds for buying inventory, paying for an unexpected expense, or meeting payroll when clients are slow to pay. Having a line of credit also gives you the freedom to invest in new opportunities or bid on larger projects, knowing you have a cash reserve for the initial expenses that will result in your business’s growth.
Unlike a business credit card, you will receive cash from the line of credit to use any way you need. A credit card can pay for physical products, but a line of credit can also be used for payroll and other expenses.
It helps when your income is inconsistent
Like most trade workers, you probably have a busy season. While your cash flow is excellent for part of the year, you still have expenses during the slow months. A business line of credit can help even out the natural ebb and flow of your income. Having easy access to extra funds helps you cover your obligations and be prepared to grow your business any time of the year.
When your cash flow improves, you can pay back into the line of credit. Unlike other forms of borrowing, paying back a line of credit early is encouraged and carries no penalties.
You can grow your business without additional debt
Businesses need capital to grow. Sometimes finding the resources to pay for more employees or supplies is difficult. A line of credit can give you the flexibility to expand with little risk. With a one-time application process, you can borrow money as needed over time and adjust to the growing needs of your business.
After you expand and your revenue improves, pay back the line of credit early. Any money that you pay back becomes available to borrow again if you have a new opportunity or need.
You retain control of the business
When you need additional capital, you may consider bringing in outside investors. If you do so, they will have some say in how money is spent and the direction of growth for your business. Having a line of credit allows you to invest in your business while retaining control.
Your lending institution will require proof of your ability to pay back the borrowed amount, but does not retain any control over how the funds are used or decisions that are made about your business plan.
You want to be prepared to pay back the money you borrow
The best time to secure a line of credit is before you need the funds. A lender will look at your business’s history to determine if you are able to pay back the loan, and your interest rate will depend on your credit score, annual revenue, and the business’s cash flow.
For a larger line of credit with a lower interest rate, collateral will be required. This can be land, buildings, or your business’s equipment.
You will only pay interest on the amount that you borrow, not the entire amount that you have been approved for. Securing a business line of credit before you need it will give you the advantage of being prepared to invest in your business and new opportunities that arise.
A business line of credit is the perfect choice for you if you need additional flexibility from your lender. It will give you an extra pool of cash to draw from in the event of a need or new opportunity because there are few restrictions on how it is used. It’s a great choice for many small businesses with inconsistent cash flow or that anticipate needing capital to grow in the near future.