Insureon Blog

Why Every Business Should Have a Line of Credit

2. January 2018 20:28

business line of credit

By Meredith Wood, Fundera

If you struggle with reliable cash flow for your business, you’re not alone. Clients don’t pay on time, sales slowdown, and equipment gets pricey. Every business needs cash on hand to deal with unexpected challenges and keep bankruptcy risks at bay.

To ensure you never find yourself in a cash squeeze, you should have a way to access capital quickly. That’s where a business line of credit comes in.

Here’s why every business can benefit from having a business line of credit.

What a Business Line of Credit Offers

A business line of credit is a flexible form of financing that businesses can access as needed. A line of credit is usually revolving, meaning that you can tap into it again and again (as long as you haven’t hit your credit limit).

Once you secure your line of credit, you will need to pay back the amount you draw on (plus interest) within a predetermined repayment period. You could also pay back the amount immediately to save on interest.

In many ways, a business line of credit is similar to a business credit card. However, you can transfer money from your line of credit directly into your bank account, whereas with a credit card, a cash advance will likely come with hefty fees. Plus, credit cards tend to have higher APRs and shorter repayment terms.

Why a Line of Credit Can Benefit Any Business

There are certain advantages that come with opening a business line of credit over more traditional forms of financing. Some include:

With such clear advantages, it’s easy to see how any business can benefit from having a line of credit. If you can use it strategically and carefully, this type of funding can help you fill short-term finance needs.

Using a Line of Credit Correctly

Given how lines of credit are structured, it’s fiscally responsible to only use them for short-term activities, such as payroll, seasonal inventory, and marketing campaigns.

Considering that a line of credit functions to get rid of short-term cash flow issues, it’s best used in combination with loans that are suitable for long-term investments and activities.

For instance, SBA loans usually have lower interest rates than almost any type of financing, allowing you to get a lump sum of cash to be repaid over an extended period of time.

Combining a line of credit with this type of term loan makes sure your short-term capital needs are solved while putting you in position for long-term success.

A Final Thought

A line of credit offers clear benefits that every business should take advantage of. Before you actually obtain a line of credit, compare your options to make sure you get the best deal.

Also, analyze your company’s current financial situation and long-term goals. A line of credit in combination with long-term funding can ensure your capital needs are met and help you work toward big-picture goals.

About the Author

Meredith Wood

Meredith Wood is the head of content and editor-in-chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident finance advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.

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