Anyone who has been in business for a while knows you need a small business loan from time to time. There are many good reasons to borrow money. But one of the most challenging decisions can be choosing the right financing. For instance, when is the best time to use a business line of credit? Marco Carbajo is a business finance expert who often writes for the US Small Business Administration. He says, “When the going gets tough, a business can fail unless it has access to cash on demand. For business owners, getting unsecured lines of credit is by far the best choice for having cash on demand.”
He’s right. But let’s dispel any myths you may have heard. And talk about how you can use a line of credit, or LOC, to grow your business.
WHAT IS A BUSINESS LINE OF CREDIT ANYWAY?
A business line of credit is a type of small business loan. Your bank agrees to lend you a certain amount of money. But unlike a conventional business loan, you don’t get the money up front. It is “assigned” to you for future use. You can draw as much as you want, whenever you want. If you don’t repay the entire balance right away, you’ll pay interest on the remainder.
Business lines of credit are usually unsecured. So it takes pretty good credit and considerable financial documentation to be approved. Sometimes, a business line of credit includes check writing capability. That makes accessing your money even simpler.
In a way, business credit cards are a line of credit. Most often, they offer a revolving pool of money you can draw on whenever you need it. The lower your balance, the more cash available. Like a line of credit, business credit cards can have high limits, which makes them very useful. Your business can also get multiple credit cards, giving you access to even more cash. The biggest difference is that a business line of credit will have a much lower interest rate.
Many businesses have both a line of credit and at least one credit card. That said, it is crucial to remember that these are financial tools. They have your back when cash flow is too low to cover your needs. But if you run up the balances on either your line of credit or your credit cards, you’ll waste money paying interest. And you’ll put the ready cash you want out of reach.
WHEN SHOULD YOU USE A BUSINESS LINE OF CREDIT?
Investopedia notes, “Businesses have been using lines of credit for years to meet working capital needs and/or take advantage of strategic investment opportunities …to smooth out the vagaries of variable monthly income and expenses, and/or to finance projects where it may be difficult to ascertain the amount of funds needed upfront.”
In other words, this type of small business loan is very versatile. It puts working capital at your fingertips for almost any purpose. You can cover ongoing operations expenses in the off season. Stock up on inventory in a hurry. Handle an emergency without losing a beat. Or hire more people for a last-minute big job.
IS AN LOC RIGHT FOR YOU?
Small business owners often look to non-traditional forms of financing to meet short-term needs. Common favorites are merchant cash advance and accounts receivable factoring. A merchant cash advance is basically financing against future credit card sales. With factoring, you sell unpaid invoices to a third party. Either way, you get the funds you need up front. Both types of small business loan are fast and hassle free. However, the cost of these business loans is higher than for a business line of credit.
The beauty of a line of credit is that it’s already in place when you need the money. Access to cash is immediate, and there’s no additional paperwork involved. The amount you can borrow depends only on your credit line — or your remaining balance. Merchant cash advances are limited by your average monthly credit card sales. And factoring is limited to whatever receivables you have on hand.
For any small business that qualifies, establishing a line of credit makes excellent sense. Once you’ve completed the initial paperwork and are approved, your business has a financial cushion. That can give you tremendous peace of mind. And when a problem or an opportunity crops up, you’re prepared to act fast. You won’t lose momentum. And you could gain a nice competitive advantage.
Talk to one of our business lending experts at United Capital Source first. I noted earlier that business lines of credit usually come from your bank. But the lending marketplace offers options these days. Our job at UCS is to help you find the very best program for your business. You can skip the time-consuming research and reading all that fine print to compare alternatives. You can think about how you’ll use your line of credit to grow your business.
If you aren’t sure you qualify for an LOC, that’s another good reason to call us. Maybe your business credit isn’t quite up to par. Or it’s just plain bad. We can still help you. A business line of credit may not be right for you now, but you can get the funding you need with another type of small business loan. And the right business loan can help rebuild your credit. That’s a pretty smart investment. Improving your credit will benefit your business in lots of way.
Please don’t hesitate to give us a call. UCS specializes in helping small business with poor credit. We understand just how tough it is to compete and survive in today’s economy, let alone get ahead. But we also know you want your business to grow, more than anything. It’s your baby. We can show you how to use small business loans to reach your goals. And with improved credit, you’ll be eligible for a line of credit, too.