You may need to borrow money to meet your business’s short-term objectives or goals due to the business cycle. Obtaining a business line of credit is a frequent method of obtaining these cash. A business line of credit can help with a business cycle’s highs and lows.
What’s a Business Line of Credit?
A business line of credit is an agreement between a financial institution, generally a bank, and a customer that specifies the maximum loan balance that the bank will allow the borrower to keep. The borrower can take money out of the line of credit at any moment, as long as he or she does not go over the agreed-upon limit.
The advantage of having a Business Line of Credit over a traditional business loan is interest usually is not charged on the portion of the line of credit that is not used, and your company can use the line of credit whenever it is needed. The line of credit may be categorized as a demand loan, which means that any outstanding sum must be paid immediately at the request of the financial institution, depending on the terms of your agreement with your bank.
A business line of credit loan is a sort of bank loan that is given to businesses to assist them finance a variety of activities. A line of credit is typically used to provide a firm with short-term money for fundamental day-to-day operations, such as meeting payroll, acquiring supplies, expanding working capital, or obtaining additional inventory for a seasonal push. Many firms experience cash flow issues at some point. Cash flow problems can arise for a variety of reasons, including a large account that has fallen behind on payments or a seasonal increase in sales.
Even if you’re currently managing your cash flow well, you can’t always anticipate the conditions in which you’ll find yourself a few months from now. It’s likely that you’ll find yourself in a situation where you can’t pay your employees or vendors because you don’t have enough cash in the bank.
A constant source of capital is required for successful day-to-day operations. While saving enough money to weather these storms is the best option, applying for a line of credit with a financial institution or bank is the second best option (if you don’t have enough saved up at the present).
Applying when you have plenty of cash gives you an advantage with lenders—after all, we all know that banks are more willing to lend you money when you don’t need it than when you do. That’s where a company line of credit loan might help you make sense of your finances. It’s important to have a reliable source of cash to keep your company functioning smoothly and profitably on a daily basis
Why Should You Apply for a Business Line of Credit?
There are several compelling reasons for any company to establish a line of credit. Every company requires that you have some cash on hand. You have it sometimes and don’t have it other times. Wouldn’t it be great if you could have it whenever you needed it? This is precisely what the lines are for. A line of credit will be available when you need it, and you are under no obligation to use or pay for it if you do not. If your company qualifies for a business line of credit, you can use the funds whenever you need aid with cash flow problems. Having a line of credit on hand can also come in handy when you come across a very fantastic deal or a particularly low inventory pricing, or when you need to cover anticipated seasonal sales decreases. The extra cash will help you get by until your firm is back on track. A line of credit should not be utilized to rescue a company out of a major continuing financial problem; rather, it should be viewed as a safety net to keep the company afloat until their accounts receivables arrive. Lines of credit are designed to be used, paid off, and re-used as needed.
Although it’s popular to compare a line of credit to a credit card, the two types of financing are quite different. There are no credit card fees with a business line of credit loan. Did you know that for short-term funding, most businesses turn to credit cards and credit card cash advances first? You can undoubtedly use corporate credit cards to keep your firm afloat, but you’ll be paying some exorbitant interest rates and fees. At all costs, you want to avoid exorbitant credit card fees. That money will never be returned to you! Rates on credit cards will never be as low as those on a business line of credit. A business line of credit, while not a credit card, functions similarly to one. It has no fixed payments and is often based on an adjustable market-based interest rate. Check with your bank because each financial institution’s business line of credit is different. In most circumstances, however, the business owner can pay off the entire sum at any time (or after six months in some cases) without incurring a pre-payment penalty.
It will also give you piece of mind to get a business line of credit. You might want to be able to sleep at night without worrying about who will pay the bill so you can pay yours. To qualify for a line of credit, you don’t need to anticipate cash flow problems. Consider it like an insurance policy that you don’t have to pay for until you need it. You’ll sleep better at night knowing that if you run out of money during the month, you’ll always have enough to pay your bills or make payroll.
So, What Should Business Lines of Credit Be Used For?
A business line of credit is a type of credit that is used to fund a company’s short-term working capital needs, such as inventory purchases, future project costs, or payroll. The fundamental purpose of a line of credit is to assist you balance your cash flow. The interest rate is normally based on the prime rate plus one to three percent, and the terms are usually annual. Only interest is paid on the amount borrowed.
Keep in mind that banks usually prefer to see that the line has been “rested,” or paid down to a zero dollar sum, at some point throughout the year. As a result, don’t borrow more than you think you’ll be able to repay in a reasonable amount of time. Depending on your business needs, credit lines might range from $10,000 to $500,000.
Whether you’re a small business or a large corporation, you’ll get into a situation where you can’t make payroll for the month. Making payroll is an important part of keeping your business functioning, and it also helps you keep your current work personnel.
Many situations arise in company, and you can’t always forecast whether you’ll need to hire an additional employee to handle a sales surge or whether you’ll be unable to pay your current employees because someone hasn’t paid you. While every organization should have a financial reserve on hand in case of a catastrophe, the crisis can sometimes outlast the money. These are the types of situations where you should use your business line of credit.
Small businesses require inventory to get started, and they must also plan ahead for future inventory requirements. As a business owner, your success is determined by your ability to continuously deliver exactly what your clients want, when they want it. Meeting that demand keeps your company afloat; going above and beyond helps you expand. Because most small businesses are seasonal, you may require additional inventory before making enough money to pay for it.
Business line of credit loans are ideal for helping a company manage its inventory requirements. While you may be skilled at calculating how much inventory you have and need on a monthly basis, it might be difficult to pass up a great deal or sale on a product you’ll need in the future. Drawing on your credit line to purchase additional merchandise (especially at a fire sale price) is a popular technique if you don’t have enough cash on hand. You can repay your line of credit and ready to use it again when the need comes once you’ve sold that inventory and made a profit.
Seasonality is a factor in many small enterprises, notably those in the retail industry. And being seasonal means that the majority of your sales occur during one (holidays) or two seasons each year. It’s challenging to equalize your debt and income over a 12-month period when you’re just getting started and have little cash flow, especially if you’re starting from nothing.
If the majority of your business’s sales occur during the holiday season, you already know that you’ll need to start purchasing goods far ahead of time. Unfortunately, this may not fall during a profitable period for your company, and you may not be able to pay for all of that inventory. This is the perfect time to take up a company line of credit loan! If you open your line of credit before the holiday season, you’ll be able to buy a lot of merchandise to get ready for the season. It wouldn’t take long after the holidays to pay off the line of credit with the Christmas sales revenues, and then you’d be ready to start all over again.
Many companies take out business line of credit loans to help them expand their operating capital. Working capital lines of credit are available from many financial institutions. By bridging the gap between the tasks you need to complete and the financial flow you need to complete them, this form of loan can help you take your business to the next level.
The difference between current assets and current liabilities is known as working capital. Current assets are the most liquid of your assets, i.e. cash or anything that can be changed to cash fast. Any commitments that are due within a year are considered current liabilities. Working cash is what keeps your company afloat. It’s the amount of cash you have on hand to pay off your company’s existing debts, and it’s the cushion or margin of safety you can provide to your short-term creditors. It is also what funds growth if you have enough of it. The majority of small enterprises just do not have enough of it!
You are not alone if you don’t have enough of it. Many firms use their business line of credit loan to help them get started and expand. Lines of credit are an excellent method for small businesses like yours to raise cash and begin focusing on expansion. It is critical to have money on hand in order to expand your business and fund costs such as marketing, payroll, and any other financial obligations that arise. Positive working capital is necessary to guarantee that your business can continue to operate and that it has enough cash on hand to pay down short-term debt and meet foreseeable operational expenditures. Inventory management, accounts receivable and payable, and cash management are all part of working capital management.
A business line of credit might help your company fulfill its needs while still having cash on hand. You can’t earn money without money, as the old saying goes. So, whether you need to buy merchandise, raise working capital, or pay your employees this month, business lines of credit loans are an option.
If you’re interested in acquiring a line of credit for your company, contact us today!