Managing cash flow is always a BIG challenge for small businesses. Fluctuations in the cash flow are a routine part of business and have a strong impact on business performance. For smooth business performance, actively managing a business cash flow is the key. Business credit line serves as an effectively tool for effective cash flow management.
A business credit line is a credit given to businesses by a government, bank or other financial institutions. It can take any form from overdraft protection, demand loan, term loan, discounting, commercial bills purchase, to revolving credit card account. A business line of credit is different from a business loan because the same is uses as a contingency option if your business is having unforeseen cash flow problems due to late paying debtors, unplanned operating cost, or by seasonal cycles. A borrower can easily draw a credit line as and when needed and the interest is only payable on the amount actually withdrawn. With a business line of credit, a business can also strengthen its credit score.
Who Can Use A Business Credit Line?
A business line of credit is the most suitable funding options for startups. Startups usually have limited capital needs and a credit line can help them get off the ground easily. For established businesses, a business credit line works as a safety net, and offers great flexibility to business owners’ advantage. Business credit lines come in different options, each with their pros and cons.
The conclusion is, you need to do your research properly before choosing the right financing option. There is no “one size fits all” funding solution. The prime benefit of a business line of credit is that interest is payable only on the amount actually use, giving small businesses the flexibility to invest, and meet their financial obligations.
Business Credit Lines Vs Business Loans
Use Of Money
The major difference between a business credit line and a business loan is that, a business loan is applied for a specific reason. Whereas, a business line of credit can be used multiple times. Business loans are usually used for specific one-time purposes in higher amounts such as purchasing a franchise or building relocation.
Another major difference is the repayment terms. Business loan repayments terms are fixed and monthly. A business line of credit is repaid only when you used it.
Closing costs for business loans are typically higher. The “maintenance fees” for a business credit line is higher due to the flexible repayment terms.
How to Get A Business Credit Line?
Getting a business line of credit starts with proper research and planning. Searching for a perfect funding solution that suits your business needs best should be your goal. So, make sure you’re taking steps to exhibit that you’re serious about your business performance. If you are a startup, start by writing a strategic business plan. On top of all these steps, you also need to show how you will be able to generate income to repay the loan.
Along with the initial steps, have a look at your personal credit ratings. If you’re a startup, your lender will review your personal credit score. Higher credit score get you quick funding with lower interest rate and lower credit score will do the opposite for you.
It’s notable that a credit line can also be obtained from other lenders as well. If you’re having a short term cash flow problem which can be handle with a small cash addition, request your bank for a business credit card instead, or try alternative credit line providers like Merchant Advisors.
Interest & Fees
Business loans have higher interest rate as compared to business credit lines. Whereas a business line of credit usually has fees to keep the credit line accessible even if you don’t make use of it. So in actual fact, you might pay slightly more in apparently lower interest rate of a credit line.
Eventually, business credit lines offer flexibility that many other financing solutions don’t, nonetheless, this flexibility adds a cost. You need to take extra special care when selecting a line of credit lender for your cash flow needs.
Securing A Credit Line
Different lenders have different lending requirements, but all have one factor in common: borrower’s capability to repay the credit line. Many business credit lenders require profitable business with a positive cash flow. Others review different factors like your business receivables or your sales history before making a decision.
Best Ways To Utilize a Credit Line
As stated earlier, a business credit line is best for short-term financial needs of a business, but it is advised not to overuse your credit line to baffle financially. Use only you need to generate revenue, as the same will offset the new debt you’ve acquired and help in achieving the targeted business growth.
Where to Look For a Credit Line Provider?
When choosing a business credit line provider, you need to make sure you are at ease with the lender. A provider who understands your business well and its needs, and is familiar with the environment.
A best credit line provider is one who can identify the challenges your business is facing—whether its seasonal, or slow paying customers, it will be friendly in resourceful planning and can tailored the best financial solution by recognizing these challenges.