Five Things You Should Know About A Business Line of Credit

When it comes to using alternative financing, there are so many products on the market it can be difficult to decide which route to go. Before applying for a financial product, you need to understand how you can use this capital injection in every aspect of your business as well as the ins and outs of what makes the financial product tick.

A business line of credit is one of several financial products that can help support business owners through the day-to-day trials and tribulations of entrepreneurship.

But what is a business line of credit? Bankrate explains it well: “A business line of credit is a type of revolving credit ; a business can withdraw funds whenever the need arises, as long as the credit limit isn’t exceeded. Interest then accumulates on the funds that are drawn, usually at a variable rate.”

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Let’s take a deeper dive into five key things you should know about a business line of credit.

1. It can cover short-term cash flow needs.

Most businesses will, at some point, struggle with short-term cash flow needs. The economy is constantly changing, and shifts can arise at a moment’s notice.

This is where having a business line of credit can be handy as you can pull from it to ensure you always have capital squared away. Popular uses of this include recurring expenses such as payroll or covering the cost of stocking inventory.

2. It can finance the growth of your business.

A business line of credit isn’t solely used in times of hardship, it can also be a great resource for investing in the growth of your enterprise. The flexible nature of a business line of credit makes it a helpful tool for all stages of the expansion process. You can use it to pay for your initial market research when searching for potential new locations, to support aspects of opening new sites such as redecoration or branding, or even use it as a way to fuel your workforce and hire additional staff to operate your new venture.

3. It helps with seasonal fluctuations.

Seasonality plays an incredibly heavy role in many businesses, whether it’s the holidays with a massive influx of income or slower times such as the summer when your clients are going on vacation. These changes can create fluctuations in your capital.

You can use a business line of credit to bridge small gaps around times when you know that capital is on the horizon at the end of one season or the start of another.

4. It can function as a lifeline for your business.

Accidents happen, and things break. It’s all a part of life. You can’t control when unexpected expenses such as crucial equipment breakdowns occur, and you don’t want to be caught unprepared and eat the costs when an emergency forces you to close your doors for a few days.

A business line of credit can work as a safety net for incidents such as these. You can access the funds you need, as they are squared away and ready, eliminating the likelihood that these expensive costs will have to be taken out of your own pocket immediately and unexpectedly.

5. It can allow you to make business purchases.

Do you have a piece of equipment that you’ve been looking to replace with a newer model to make your business more efficient? Maybe you want to stock up on inventory, but the price tag attached to doing so is too much for your organization to spend in one lump sum.

A business line of credit allows you to make that big purchase now and pay for it over time, cutting out the need for a large upfront payment while allowing you to grow sustainably at a rate that doesn’t sacrifice the health and well-being of your business.

Understand the limitations.

While there are several benefits to using a business line of credit and endless scenarios of how you can use one as a boon for your business, it is always crucial that you approach any sort of financial product with an understanding of its intricacies.

Before taking out a business line of credit, make sure you understand the interest rates associated with the specific loan. Lines of credit often come with interest rates that are higher than other forms of business financing such as a business loan.

Also, note the limit that is available to your business, and ensure that you are not taking out more of a business line of credit than what your business could ever need. This will help you avoid the temptation to overdraw and the difficulty that comes with repaying the debt later down the line.

Verify if there are any additional fees that are associated with the specific business line of credit you are selecting, such as annual or maintenance fees, as you should weigh these costs when considering financial products.

A business line of credit can be a good tool to have ready in your business’s arsenal, but like all financial products, it comes with its catches and limitations. Always research thoroughly when looking at any and all financial resources, and take the time to think about how this will impact your business over time.