Every small business faces periods of lumpy cash flow. Savvy small business owners also understand that the best laid plans (or budgets) can fall by the wayside quickly.
Many of them understand that to stay ahead of the curve, a business line of credit is a fast and convenient option to access funds.
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.
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This article was first published on October 9, 2018. It was updated on
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