It's alarming that, according to a U.S. Bank study, 82 percent of small business failures are due to poor handling of cash flow. Clearly, most businesses need a better understanding of where capital can be obtained quickly and inexpensively.
This is where a business line of credit can help.
Designed to provide small businesses with needed capital, a business line of credit functions similarly to a business credit card or personal line of credit. However, it is much cheaper for getting cash advances. This line of credit can be unsecured up to a certain amount (such as $100,000), which means you won't have to put up collateral, or it can be secured by a personal or business asset.
The business line of credit is something every business should really have, because having sufficient cash flow at all times is crucial to meeting goals, and ultimately growing the company. Moreover, having this type of credit in your financial playbook comes with perks that make managing and expanding your business easier.
Greater Control of Capital
Unlike a traditional loan, which just provides you with a lump sum of cash to be paid at a fixed or variable interest rate over a certain timeframe, the business line of credit allows you to tap into funds as you need them. This gives you control over how much money you take and when you take it. Additionally, you are only required to pay interest on what you use.
A business line of credit is commonly called revolving credit. This means the lender offers access to a certain amount of capital for an unspecified period. As payments are made, you get access to those funds back. The ability to continually access funds enables greater control over your business's finances, and gives you the freedom to continually make growth-driven decisions.
Don't forget, a business line of credit, if it offers you enough capital, keeps investors--and their tendency to want to control the business--out. According to research completed by Noam Wasserman, a professor at the Harvard Business School, of all the ventures started in the late 1990s and early 2000s, only 50% of founders remained as CEO after three years. Hence, if you want complete management control over your business, a line of credit is a solid funding alternative to traditional investment. Even if you envision investors will have to be part of the picture at some point, a business line of credit allows you to build your business at the start the way you want.
You are pretty much free to use money from a business line of credit as deemed fit. It provides you the flexibility to put your cash where it is most needed, when it is most needed. With some closed-end loans, like a CDC/504 real estate loan from the Small Business Administration, you have to use that cash for a certain purpose.
Furthermore, while traditional loans come with fixed monthly payments that may be challenging for young companies to meet, lines of credit boast much more flexible repayment options, making it simpler to navigate the inevitable ups and downs of business cycles. You can pay off a higher percentage of the balance when revenue is up, and just pay off the minimum required when revenue is down.
With such flexibility in how you use the cash and repay, you have the financial space you need to constantly make the right decisions for your company. You don't have to worry about cash flow for any part of your business, because it's there when you need it. And that should give you peace of mind.
Consider this: in the first half of 2014, according to a survey by Federal Banks, only half of those entrepreneurs who applied for a small business loan received any sort of capital. The reasons for this shocking percentage of denials abound, but undoubtedly bad credit or no credit was a main factor.
Although a business line of credit can provide cash flow when needed, you may need other funding at some point. Small business loans can provide lots of capital at manageable interest rates, and are thus an attractive funding source. For many businesses, the best way to get a good enough credit score for a favorable loan is by establishing a positive credit history with a business line of credit. This requires making payments on time and keeping a low balance.
Hence, a business line of credit gives you the opportunity to build yourself into a known reliable borrower. That will aid you in obtaining capital from lenders and investors, and therefore help you in driving your company to a brighter future.
Low Interest Rates
Most unsecured business lines of credit follow the prime lending rate. This rate does fluctuate and is usually much less than a credit card's interest rate.
If you consistently pay on time, rates will stay on the low end and you will enjoy cheaper access to capital (and potentially higher credit limits). On the other hand, if you miss payments and/or underpay, rates will rise and debt will accumulate, which can limit your access to capital and stall growth.
A Quick Source of Funds for Short-Term Needs
When you're running the business, you need to be focused on the product and delighting your clients. You don't want a new project to get stopped in its tracks because you're a dollar short and don't have time to apply for a loan.
A business line of credit, even if you find you use it infrequently, can come in handy in so many circumstances because the funds can be accessed almost instantly. For example, you can use the credit line for paying salary to contractors who helped with a big project, injecting capital to make up for late-paying clients, fixing broken equipment, and whatever else comes up.
Simply put, a business line of credit is the backup you require to take your mind off money, and have fun running your business.
Making the Business Line of Credit Work for You
You want to take advantage of all these perks, but you don't want to overindulge. All too often young businesses mismanage finances and use too much of this business line of credit, which limits the very financial control and flexibility they sought when applying.
As mentioned, a business line of credit carries many benefits and is a must-have for any business if you can utilize it carefully and strategically for short-term funding needs, like upgrading the office or financing a marketing campaign. If it gets tied in long-term investments, it can be dangerous.
So, learn all you can, set clear rules for using the line of credit, and stay diligent. Then, you'll start to reap the benefits of this wonderful funding source.