As a small business, there will be times when you need money you simply don’t have. So when small business owners look for financing, a line of credit is usually a leading consideration. According to the Small Business Credit Survey, 86 percent of credit applicants seek a loan or line of credit for their business — for good reason. With a business line of credit, you borrow capital up to a certain limit and pay interest only on the portion you use. You draw cash, repay funds and then get immediate access to the capital again. Rinse and repeat.
If you don’t have a business line of credit yet, you’ve probably considered it. But how do you really know if it’s time for you to get a business line of credit? Here are four signs now’s the right time to get a business line of credit:
1. You Look for Financing in a Rush
Simply put: fast cash is expensive cash. If you find yourself frequently searching for short-term loans, merchant cash advances or invoice financing, then a business line of credit could save you time, money and a whole lot of hassle. Even if you don’t use your line of credit often, it can come in handy when you need cash in a pinch to buy inventory or pay for an unexpected expense.
At some point in your time running a business, you’ll need access to money but won’t have time to wait for a traditional loan, and quick loans can be expensive — that’s where a business line of credit can help. With a line of credit, you’re switching your mentality from putting out fires to preventing them. It’s the reserve you need to avoid wasting time trying to find money in a hurry so you can focus on running your business instead.
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2. Your Business Credit Card Isn’t Cutting It
Business credit cards are a fantastic and necessary part of a small business financing portfolio, but they typically work best for smaller recurring expenses. On the other hand, a business line of credit is a great option for maturing businesses with larger ongoing expenses because lines of credit generally offer more flexibility, including less restrictive rules on cash advances and higher credit limits.
With a line of credit, you can usually request a cash advance as often as you need up to your available credit limit. Credit cards, however, often cap advances at 20 percent of your credit limit and generally come with more expensive fees and interest rates. Plus, lenders often extend a much higher credit limit through a line of credit than with a business credit card. So, if you find your expenses are exceeding your credit card’s capabilities, a line of credit is likely a better option.
3. You Need a Financial Safety Net
A line of credit is super flexible, allowing you to finance whatever surprises life throws at your business. Whether you need capital to seize an immediate opportunity or to survive a disaster, a line of credit provides the safety net you need with the flexibility you want. Unfortunately, 82 percent of failed small businesses attribute their defeat to poor cash flow management, according to a U.S. Bank study, an issue that a business line of credit could help mitigate.
You can use your line of credit for just about anything. It’s there if you need it, but you don’t have to use it. If you do tap into it, then you only need to pay interest on the funds you use, not the entire credit amount. A line of credit gives you the confidence to deal with any surprises, while the repayment method empowers you to use it without guilt when necessary.
If you’re unable to build a huge savings fund to deal with emergencies, you can prepare for crises with a line of credit instead. Yes, it’s important to have a cash cushion on hand, but too much money sitting in the bank does your business little good. Think of ways to grow your business and get your cash working for you while maintaining a line of credit to deal with the surprises.
4. You’re Planning for a Larger Loan Down the Road
A business line of credit will provide you with cash flow when needed, but it might not be enough if you’re planning for a larger expense in the near future. The typical line of credit limit usually falls anywhere between $1,000 and $500,000, which isn’t enough to cover more substantial investments. To fund these projects, you’ll need a small business loan.
The NSBA Small Business Access to Capital Study found that 20 percent of small business loans are denied because of poor business credit. If you’re struggling to qualify for business loans, then a line of credit can help. Long credit history or an excellent credit score isn’t necessary to secure a business line of credit. Once obtained, you can use a line of credit to establish a positive credit history by making timely payments and keeping a low balance. Then, when the times comes, you’ll have the business credit score you need to qualify for bigger loans at better rates.
The Bottom Line
If your company is feeling any of these signs, it’s a good indicator you’re ready to get a business line of credit. Don’t wait until you need capital to acquire a line of credit — find one sooner and use it later.
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