Are Lines of Credit Good or Bad for Your Business?
Many business owners look for ways to get financing. With an extra source of capital, it’s easier to prepare for the unexpected. You have money to invest in business growth and equipment. Lines of credit are a popular tool for having financing for any need. Should you apply?
The Benefits of Business Lines of Credit
One advantage of business credit lines is that they stabilize your monthly cash flow. They give you wiggle room for paying your suppliers. Even if your customers are taking a while to pay, or sales have been slow because of the time of year, you always have the capital to cover the most important demands.
You can use a line of credit for virtually any business need. That includes purchasing inventory and paying your employees. You can repair equipment or buy new equipment. You have the money to put towards advertising or website development. This flexibility helps your business grow because you don’t have to trim essential items.
Finally, business credit helps you extend your wings in new directions. Imagine that a customer sends you an unexpectedly large order or the demand for your products surges suddenly. What can you do? Instead of missing out on profits or putting your clients on hold, you can use your line of credit to purchase more inventory to cover the demand. Everyone wins.
Some Downsides of Revolving Credit
Like other financial tools, you have to use your line of credit responsibly. Otherwise, you can run into problems. For example, it’s recommended to leave some of your approved cap available most of the time rather than drawing the full amount. This helps your credit score. Always paying the balance on time also boosts your business’s credit score.
A line of credit has higher interest rates than long-term loans (but less than credit cards). This can add up if you use the funds for the wrong items. For example, if you’re purchasing construction equipment, it’s usually a better idea to use an SBA loan or equipment loan instead of using up your entire business line of credit.
The Bottom Line
Like many types of financing, lines of credit can be a powerful asset when you use them correctly. The trick is knowing when this type of credit is smart and when you should select a different option. The more you understand how revolving credit works, the better you’re equipped to get the maximum return on your investment. Don’t hesitate to ask questions when applying.