How to increase financial flexibility through the smart use of a line of credit.
Cash is one of the most critical aspects of running a business. But even the most successful companies sometimes need flexible access to capital to invest in seasonal inventory, bridge a slow sales month, or simply to secure some breathing room. Business lines of credit can provide short-term funds for daily operations or help lock in growth opportunities and long-term investments.
Because credit comes with strings attached, it’s worth understanding the key components before diving in: how lines of credit work, what they cost, and how to apply and maintain good standing. In this guide, we’ll explore all aspects of lines of credit so you can make informed decisions about financing your business.
What is a line of credit (LOC)?
A line of credit is a flexible financing option that allows you to borrow funds up to a certain limit and repay them as needed. Lines of credit for businesses play an essential role in your financial flexibility and can be used for various expenses such as payroll, inventory, and other operational costs. An organization operating in today’s dynamic environment requires a financial cushion to ensure smooth operations.
The best part about a line of credit is that it allows you to borrow only the necessary amount and only when needed. This makes it an especially popular choice for small businesses that experience cash flow fluctuations throughout the year.
Common types of LOCs
Lines of credit are a versatile financial tool that can provide individuals and businesses with flexible access to funds. Personal lines of credit are typically unsecured, meaning there is no collateral for the bank to take over if the borrower stops paying. They can be used for various purposes, such as covering unexpected expenses or consolidating high-interest debt. Home equity lines of credit (HELOCs) are secured by the value of the home and allow homeowners to leverage the equity in their property, providing a source of funds for home improvements, education, or other needs.
On the other hand, business lines of credit are designed to help companies manage cash flow, bridge gaps in receivables, or invest in growth opportunities. They offer businesses the flexibility to borrow and repay funds as necessary, providing a valuable lifeline during both lean and prosperous times.
Lines of credit for businesses are typically provided by banks, credit unions, and other lenders and offer flexible access to funds. Some common types of business lines of credit include unsecured business lines of credit, secured business lines of credit, and invoice financing lines of credit. There are countless options available to suit different needs and credit histories.
How does a business line of credit work?
A business line of credit is a trusty financial tool many businesses use to manage cash flow. Essentially, lines of credit for businesses work like a credit card—you have a set limit that you can draw from, and interest is only charged on the amount you use. The best part is that you can access funds whenever you’d like, making it a flexible solution for unexpected expenses or seasonal fluctuations.
Just remember that a business line of credit is not long-term financing, and you should have a solid plan to pay it off promptly to avoid accumulating debt and hurting your credit rating. It is, however, an excellent option for businesses seeking a flexible way to manage their expenses.
How do you get a business line of credit?
Securing a line of credit for your business can be relatively straightforward. A crucial early step is deciding how much you need and assessing your credit eligibility. Your business (and personal) credit history, company revenue, and length of time in business all affect how attractive you are to lenders.
There are many options, and as an owner, you must decide whether to approach banks, credit unions, or non-bank lenders and opt for a secured or unsecured credit line. Banks and credit unions are traditional lenders that typically prefer high credit scores, significant annual revenue, and a few years of operating history. Non-bank lenders, often found online, can be more lenient—granting access to businesses with shorter histories or lower credit scores. But looser credit conditions generally means higher interest rates.
Tips for maintaining good standing
A good credit history and consistent good standing with your lender lets you keep your LOC open in the short term and can lead to lower borrowing costs and higher limits in the long term.
There are three simple factors in keeping good credit standing:
- Pay on time
- Build a good credit history by consistently borrowing and repaying
- Manage your credit utilization: keep your balance low as a percentage of your overall available credit
By doing these things your business will not only maintain good standing with creditors but also unlock new opportunities for growth and expansion in the future.
Conclusion
Lines of credit for businesses are essential tools for securing valuable resources to help small business owners succeed in times of challenge, opportunity, and growth. Whether you choose to get funding from a traditional bank or a non-bank lender, being aware of the different types of lines of credit available and applying for one that best fits your business’s specific needs can go a long way in providing financial security.
Remember, it’s important to maintain responsible borrowing practices and remain diligent with payments once approved for a line of credit—these steps will ensure you keep good standing as well as access to future financing needs. Take control of your business finances today by researching and exploring what type of line of credit will work best for you.
References:
https://www.forbes.com/advisor/business-loans/how-to-get-a-business-line-of-credit/
https://www.bluevine.com/guides/line-of-credit/maintain-line-of-credit#
https://www.nerdwallet.com/best/small-business/business-line-of-credit
https://www.incauthority.com/blog/the-inside-scoop-on-small-business-lines-of-credit/