Business is always unpredictable. Regardless of the industry and size of your organization, there’s always a chance of the business falling into a financial squeeze at some point. Most businesses shut shop simply because of a mismanagement of cash flows. In fact, misaligned cash flows are probably the biggest reason 80% of small businesses fail in their startup phase.
A clever way to manage operating expenses and working capital is to opt for a business line of credit.
A commercial line of credit is quite possibly the most underrated financial product targeted at businesses. Most businesses either don’t understand it or don’t bother signing up. It is a financial product in dire need of publicity, simply because it’s such a good deal for entrepreneurs. Here’s what you need to know:
A business line of credit is a chunk of cash you are allowed to borrow from. Instead of taking on a whole loan on your books and figuring out how to implement it, a line of credit allows you to borrow money whenever you need. The amount you borrow is limited to a certain amount. This credit limit is based on your credit history and the outcome of your negotiations with the lender. If the line of credit offered is substantial, you can rest assured that your business’ financial future is safe.
The key advantage with a line of credit is the flexibility. Small business may not need a massive loan. Not only is a lot of debt a major burden on the company’s finances, but the interest rate might drag down cash flows as well. Instead, a line of credit makes a certain amount of money available. With the resources at your disposal, you can make crucial decisions about when, where, and how to use the funds.
Business lines of credit were mostly unheard of a few decades ago. Now, estimates suggest nearly 47% of small business have a line of credit and nearly 20% actually use them on a regular basis. Business lines of credit seem to be catching on, especially with small and medium-sized enterprises.
Before you get a line of credit you may need to ask yourself if this is the right option for you. A business line of credit may be suitable for short-term and unexpected expenses, but not for long-term capital investments. This option also allows you to borrow a substantial amount on a rather short notice. Your business credit rating, working capital requirements, and years of operation will ultimately determine what interest rate you pay, but shop around with different lenders to get the best deal. If your business has been registered more than a year ago, the credit score is higher than 600 and annual revenues exceed $100k, getting a line of credit at a decent rate should be easy.
A line of credit is a great way to secure your small business’ finances. It’s a short-term safety net that doesn’t have any impact on your cash-flows and capital structure.