How a business line of credit can help small businesses

How a business line of credit can help small businesses

Managing a business is difficult, especially when you are starting out. There are many challenges, however, the biggest challenge many small businesses face is cash flow. 

If you’re a small business struggling to pay your employees or keep enough inventory, establishing a  business line of credit may be just what you need to take your business to the next level. 

What’s a business line of credit?

A business line of credit is like a loan that gives small businesses access to funds to meet short-term working capital requirements like purchasing inventory and financing a marketing campaign. 

A business line of credit works almost the same as a credit card, only that it has much higher credit limits. You can get funds again and again provided you don’t exceed the set limit.

There are two main types of a business line of credit.

  • A secured business line of credit

To access a secured line of credit, a business puts up some form of collateral just like in a typical business loan. This is seen as a financial guarantee promising to give the lender an item owned by the business defaults on the loan.

Secured business lines of credit are common because most lenders see them as less risky, especially for small businesses with low revenues.

  • An unsecured business line of credit

Unsecured business lines of credit give businesses access to quick funds without demanding any form of collateral. In case the company fails to pay the money in time and whole, it becomes more challenging for lenders to get their money back. 

However, this doesn’t mean you go scot-free when you fail to pay money acquired from an unsecured line of credit. Lenders have the mandate to launch a claim against your business assets and capital as well as your personal finances and assets when you fail to pay off your debts. 

To get approved for an unsecured line of credit, your business must have high credit scores and revenue streams. 

How can a business line of credit help small businesses?

Small businesses suffer the most from unforeseen financial issues, making a business line of credit essential.

If you’re just starting a small business or perhaps own one and wondering whether you need a line of credit or not, here are some benefits to help you decide.

  • It’s a flexible financing option

This is one of the biggest pros of a business line of credit. It gives small businesses access to money as and when needed and repay the debt as you use the funds. And the best part is that interest is only charged on the money drawn and not the whole pool of funds.

It works differently from other types of business loans where you can’t take another loan unless you pay the existing one.

  • It gives your small businesses quick access to funds

For a small business, getting a traditional loan can be pretty challenging. When the business’s credit scores are still low and the cash flow minimal,  no lender is willing to listen to you. 

But, you still need money to run your business. 

However, a business line of credit will give you quick and easy access to funds. A small business can apply for an unsecured line of credit without having to provide any form of collateral. Besides, some lenders will even issue funds to small companies with low credit scores. 

  • It helps small businesses handle liquidity or cash flow volatility problems

Things like work shortages, temporary dips in sales, and payroll during a slow season, can strain cash flow. This, at times, may force small businesses to shut down because they cannot manage the day-to-day operations for lack of funds. 

However, if a business has a line of credit, it will always use it to smooth its cash flow.

  • It helps build your credit rating

When you’re just starting a small business, it’s hard to access loans due to the low credit ratings. The only way to build your creditworthiness is to acquire more loans, use the funds well, and repay them in time and in full. 

But where do you start getting the loans from, with the low credit rating? Through a business line of credit.

However, suppose you want to build your creditworthiness. In that case, experts recommend starting with a modest business line of credit and paying the debt in the shortest time possible to create an excellent credit profile. 

This will position your business for better loan terms should you seek future financing.

When to use a business line of credit

Business lines of credit are used to gain access to short-term business funding. The funds are used to cater for expenses like;

  • New hires
  • Past-due invoices
  • Seasonal lulls
  • Quarterly tax payments, and many more.

However, every small business has its unique challenges, and the need to use a business line of credit might vary. Nevertheless, you must ensure that you use the funds well and repay the debts in time to avoid getting trapped in a cycle of debt. Your business operations should not solely rely on a business line of credit.

Wrapping Up

Every small business will experience uncertain times. The question is, does your business have a plan to weather the storm? 

If not, it’s time to apply for a  small business line of credit. The tool offers quick access to funds to help cater to business expenses like payrolls and equipment and keep your finances running smoothly.

If you’re a small business, consider getting a line of credit to help you achieve your business goals much more easily.

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