The holiday season often brings increased sales and higher revenue. But those benefits come with a cost––buying extra inventory requires extra cash on hand, processing extra orders takes additional resources. A business line of credit can be a great way to prepare your business for the holiday rush.
What is a business line of credit and how does it work?
A business line of credit is a revolving credit line that gives business owners spending flexibility. Lenders approve the borrower for a specific amount, but the borrower is not required to take it all at once. In other words, your business can use the funds as needed up to the approved amount.
Interest rates on lines of credit are typically variable based on when you draw funds. When you make a repayment, you’ll be able to tap back into your credit line again. Many businesses maintain lines of credit to cover increased holiday expenses or to cover payroll and operating expenses during off-seasons.
How is a business line of credit different from a business loan?
A business loan is a fixed amount that needs to be taken in one lump sum. Interest rates and installment payment amounts are typically fixed. A loan can be good for major purchases or fixed expenses, but it may not be the best fit for variable expenses.
To simplify this, business loans and business lines of credit each have their place in financing a small business. Loans are good for fixed expenses. Lines of credit are more flexible and may be a better fit for variable expenses. This is not the case all the time, but it’s a good guideline to start with.
How do I get a business line of credit?
The process of getting a business line of credit is simple. The first step is to make sure you’re applying for a line of credit and not a loan. From there, do the following:
1. Check your credit score
2. Compare lending options
3. Review requirements and costs
4. Gather business documents and apply
There are several online sites where business owners can check their personal and business credit scores. Lending options include traditional banks, credit unions, and online lenders. They each have different requirements, fee structures, and interest rates.
Most of the information required to decide on a lender is available on lender websites and by submitting pre-applications that don’t affect credit scores. For a final application, the business owner will be required to submit income documentation and personal information.
Of course, before getting a business line of credit and being able to draw funds, you’ll need to have your application approved.
5 ways to prepare for the holiday season with a business line of credit
There are several ways a business line of credit can help your business. The following is a list of scenarios where you can use credit line funds during the holiday season.
1. Hire seasonal employees
Retail businesses need to bring on extra employees during the holiday season. Fulfillment centers, manufacturers, and distributors also get busier. Many of these businesses use lines of credit to cover increased costs like hiring seasonal help, which is a variable expense.
2. Stock up on inventory
Businesses can’t increase sales during the holiday season if they don’t have the inventory to sell. Consumers will go elsewhere if they can’t walk out of the store with an item or get it delivered before the holidays. A line of credit can be used to make sure you have enough inventory for an uptick in customers.
3. Launch marketing campaigns
Competition for consumer dollars is fierce during the holiday season. Marketing campaigns drive online traffic and bring customers through the door at brick-and-mortar locations. A line of credit can be used to increase your marketing budget for the holiday season to set your brand apart from competitors.
4. Optimize your ecommerce site
Driving traffic to your website is one thing, converting visitors into paying customers is another. Optimizing your ecommerce site before the holidays can increase conversions and generate higher revenue for your company. That’s a good use for a business line of credit.
5. Upgrade your POS system
Long lines at the register can cause consumers to leave and go elsewhere. Slow online payment processing causes abandoned carts and lost sales. Those are both issues with your point of sale (POS) system. Upgrading it now with a line of credit could help increase your holiday revenue.