Is a Business Line of Credit Right for You?
Many small businesses, both freshly minted and established, have run into cash flow issues at some point. Newer startups may have trouble keeping pace with the expansion of their business, while more established firms may have some unforeseen expenses that may hinder fulfilment of their current workloads. While invoice financing tends to be more beneficial for the up-and-coming business, the associated costs can prove quite daunting. For established firms with solid financial history, a line of business credit may be a better solution.
What Is a Business Line of Credit?
A business line of credit is designed to set a business up with a maximum line of credit to cover business expenses, not unlike a credit card. To obtain this line of credit, a business must have solid cash flow, good credit, and sufficient collateral to put up. This financing method is more ideal for businesses with longevity, as they may have ideally established their creditworthiness and ability to stay financially stable.
What Are Some Advantages?
First and foremost, a line of business credit generally proves less costly than invoice financing, potentially increasing the business?s share of product profits. Also, a line of credit may also prove more advantageous for long range expenses, as invoice financing tends to base the amount financed solely on the accounts receivables, rather than also factoring in cash flow and collateral.
To qualify for a business line of credit, a business generally needs to be somewhat established. The business should have sufficient assets and cash flow, as these are a couple of the determining factors for credit offered. Also, the assets and cash flow should ideally be able to hold the business until the line comes through, as the line is not necessarily designed to be a quick fix for money troubles.
Most importantly, keeping sound financial records are a must with a line of business credit. When a line of credit is applied for, all assets of the business are considered. To this end, the lenders generally would like business owners to maintain a certain net worth, track all inventory, and maintain financial ratios at a level in line with their requirements. Should any of the above change significantly, many require credit recipients to report the changes accordingly, and in a timely manner.
Is a Business Line of Credit the Right Fit?
Lines of business credit can prove beneficial for businesses with proven financial history to garner needed capital with less cost. Business owners who take out a line of credit must ensure that they have the assets and cash flow to sustain it. Businesses who fit this mold should check into this financing option.