The foundation of small business success can be attributed to many things, but none are quite so important as a strong cash flow. Without enough cash on hand, a company may be forced to limit their inventory, pass up on an expansion opportunity, or have the funds needed to pay for seasonal labor. As important as cash flow is, there are times when cash shortages occur, such as too many orders coming in, client payments that are late or not paid at all, and unexpected economic disasters. For a business in need of financial help, lines of credit may be the solution.
An Alternative to Traditional Loans
Many business owners assume that a loan is the only way to help inject cash back into their company, but this form of lending takes time and has a high probability of not being approved. With a line credit, a lender makes a pre-agreed upon amount of money available to a company to be used in any capacity. Instead of a single lump-sum payment issued from a loan, a company can draw upon the amount as often as needed in whatever size inclement.
The money that is borrowed can be repaid at any time agreed upon in the lending contract, rather than on a fixed repayment plan each month. In this way, a line of credit is similar to a credit card. Many lenders will offer credit lines that are revolving, opening up the amount repaid (less any fees) for use. This form of funding can be a lifesaver for businesses struggling to purchase new materials or get a new marketing plan going.
When compared to using a traditional loan for a cash influx, the payment amount may be too hard on a company’s budget. This is especially true if the company experiences a slow sales or profit month. Rather than struggling to pay off debt each month, in addition to trying to grow the business, a line of credit can be used as an emergency resource. The company is only required to pay back the amount that has been drawn, keeping the company from getting in debt that the budget can’t sustain. This a way to take the risk out of growth opportunities or day-to-day operations.
There is plenty of flexibility with business lines of credit, helping companies of all sizes and needs. There are no restrictions on the use of funds, and there is no delay in accessing the cash needed for purchases. This is a popular form of alternative financing.