Business Line of Credit: A BlueVine Guide for EntrepreneursJanuary 31, 2018 By Kanishka Khanna
Every small business faces periods of lumpy cash flow. Often times, this uncertainty comes on the heels of an unforeseen cost. These expenses could be a whole host of unique reasons — a new large order with high material cost or a broken machine that has production at a standstill.
Any of these can drain your bank account (and then some). It also hinders your growth. It’s tough for any company to turn away customers due to lack of working capital.
Savvy business owners understand that the best laid plans (or budgets) can fall by the wayside quickly. To stay ahead of the curve, businesses have relied on lines of credit as the fast and convenient option to access funds. Historically, business lines of credit were limited to those who could afford to wait out the long, arduous underwriting practices of institutional lenders.
Let’s break it down.
What is a business line of credit?
A line of credit is financing designed to get you access to the funds your business needs up to a certain limit. This financing tool allows you to draw up to your limit and pay off the balance on a continuous basis. The key feature of this product is flexibility: to draw anytime, to use for any business purpose, and to reuse next time.
How does the line of credit work?
The credit line assigned acts as a rainy day fund for your business needs.
Here’s an example:
Martha’s Gift Baskets receives a $20,000 corporate order, for which material costs are $10,000. Martha thought she’d saved to take on such an order, but she realizes there will be a $5,000 shortfall. Luckily for Martha, she has a $20,000 business line of credit from which she can draw that amount. She pays interest on the amount she withdrew. Once the order is fulfilled and paid, she can choose to continue the installments or pay back the remainder in one go. The $20,000 replenishes and is available for next time.
Why a Business Line of Credit Makes Sense
- Speed: Online lenders can review and approve applications within 24 hours. That can mean cash in your bank account as fast as same day.
- Simplicity: The line of credit is assigned to the business for business use, with no other strings attached. Other loan types have limitations such as the funds can only be used for certain equipment or are secured by certain assets.
Having quick and easy access to funds can be a game changer for any small business. A business line of credit is perfect for businesses with seasonal sales cycles and monthly cash flow fluctuations. It’s also ideal for businesses that typically have unpredictable, or “lumpy,” cash flow, or need to invest in their business in order to grow.
This story was first published on Dec. 29, 2015. It was updated on Jan. 31, 2018.
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The information and insights in this blog post are provided for educational purposes only, and do not constitute financial advice from BlueVine. Please consult your financial advisor before making any business financing decision. For information about BlueVine products and services, please visit the BlueVine FAQ page.
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