Small business owners don’t get a steady weekly paycheck like regular employees do. Neither does the business. Sales generates revenue at a pace that is anything but steady, particularly in the startup phase and early years of operation. That ebb and flow can sometimes result in limited cash flow. Taking out a loan is one solution to that. A business line of credit is better.
A business line of credit still counts as a liability on the balance sheet, but it can be a short-term liability if managed correctly. It’s also flexible funding, meaning that the business doesn’t need to draw a certain amount like they would with a loan. That can ease the burden of waiting on sales revenue or collecting accounts receivable with payment terms.
Those are the broad strokes. To better understand the benefits of a business line of credit, we’ve outlined a few specific business scenarios below where a business might need the cash flow boost. Coming up short due to inflationary costs or economic downturns is financially stressful. Other uses for a business line of credit, however, can be more positive.
Scenario #1: Financial stress due to inflation
The Consumer Price Index (CPI) in July 2022 showed a slightly more palatable inflation rate of 8.5% year over year. That’s better than the 9.1% we saw in June, but still a far cry from the 2% goal the Federal Reserve Bank set for itself in 2012. They’re raising interest rates to tighten spending, but the long-term effects of that are still questionable.
Meanwhile, your company is paying higher prices for goods and services. The CPI doesn’t just impact the end consumer. Manufacturers, distributors, retailers, and service providers are all paying more for the materials they need to operate. That cost is being passed on to the consumer, which is your business in the scenario we’re describing here.
Raising your prices is the only way to cover those costs. That’s not a problem if you’re getting good terms from your suppliers and can turn your inventory over fast enough. Unfortunately, they’re in a cash crunch too. Businesses are often faced with paying for inventory up front and floating operating expenses until sales can be made. A business line of credit can help relieve that pressure.
Scenario #2: Getting by while waiting for supply
The previous scenario described a situation where the cost for supplies needs to be covered before the sales cycle can mature. In this one, we’re talking about materials or inventory not arriving at all. The global supply chain is still disrupted. Just ask anyone who’s selling cars right now. There’s no inventory available, but their fixed costs are still there.
All you can really do in this situation is make the sales and wait for supply to arrive. In the meantime, a business line of credit can be used to cover fixed expenses like rents, mortgages, equipment leases, and administrative payroll. In the auto sales example, your salespeople aren’t getting commissions until those cars are delivered. You might need to figure that out, too.
Scenario #3: Backlog due to worker shortages
Here’s another blast of reality for business owners in 2022. Finding workers has become inordinately difficult. You’d think rising prices and more employment opportunities would have the opposite effect. It hasn’t. Parents are staying home to save on childcare. Older workers don’t want to risk Covid exposure. Remote work opportunities are everywhere.
If your business is dependent on human workers, there’s a good chance your production levels are down. That creates a backlog and reduces revenue. Now you’re in the same boat as the auto dealer. Your team might be making sales, but you can’t deliver. A business line of credit can help cover fixed costs and keep the lights on until you can address these issues.
Scenario #4: Expanding to survive in an economic downturn
This one can be a positive scenario. We talk about “expanding to survive,” but it can also be “expanding to thrive.” Using the extra cash flow from a business line of credit to expand your business or production capabilities can have profitable long-term effects on your company. Do it right and the extra revenue will cover the cost of the line of credit.
We’re going to ask you to think out of the box a bit here. Expansion means different things to different business owners. Adding more people is an option, but it’s proving difficult to do right now. The same could be said for stocking more inventory. Adding additional services, particularly if they’re online, is where most forward-thinking companies are going.
Additional cash flow always make a difference
Your business might not be in the same spot as any of the companies we described above, but it does share one characteristic with all of them: Additional cash flow always makes a difference. The best part about getting it with a business line of credit is that you’ll only need to pay for what you need. That’s peace of mind that can help relieve that financial stress you’re under right now.
