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Cash flow is one of the top concerns for small business owners and entrepreneurs, according to a recent report on the state of small business. That’s because having consistent cash flow is a necessity for success in any field. Unfortunately, the ebbs and flows of business, slow paying clients, operating expenses and other factors can create the occasional cash squeeze. This is where a business line of credit enters the picture.
Here’s why every entrepreneur should open a business line of credit:
1. A business line of credit is flexible “revolving” capital
A business line of credit functions like a business credit card, except that you can access cash. This makes use of funds that are much more flexible, as you can utilize the money for basically any business need, from buying inventory to reducing other debts to paying employees.
A business line of credit differs from other loan products in that it’s considered to be revolving capital. You don’t get a lump sum of cash upfront, like you do with term loans. Instead, you’re free to access the money as you need. Your credit limit replenishes as you repay what you borrowed.
For example, if you’re approved for a line of credit of $50,000, and you withdraw $10,000, your remaining available credit will be $40,000. Once you repay that money, your available credit will be back up to $50,000. In this sense, as long as you consistently make payments, you’ll have access to a supply of money. That comes in handy when the unexpected occurs.
2. A business line of credit can be much more affordable than other financing products
A business line of credit usually has competitive rates and terms, with average interest rates spanning from 7 percent to 25 percent. This means it’s often a more affordable form of funding than invoice financing, equipment financing, a business credit card and even short-term loans.
Of course, the exact rates and terms you get depend on your credit, revenue, time in business and other factors. Obviously, if you have an established business with consistent revenue, the more likely you are to get a high credit maximum at attractive rates and terms. Be sure to compare with other options before agreeing to an offer.
Additionally, you only pay interest on what you withdraw. So, when business picks up and you don’t need to tap into your credit line, you won’t be charged interest.
3. A business line of credit keeps you in control
Few financing options offer you control like a business line of credit does. Not only do you get to use the funds as you need and see fit, you also don’t have to meet the demands of lenders and investors.
For example, it’s alarming that many entrepreneurs that build successful companies actually aren’t in a leadership position when the business goes public. According to research from Noam Wasserman, a business professor and expert on entrepreneurialism, for startups in the late 1990s and early 2000s, only 50 percent of founders remained the CEO after three years into the venture. This is mainly because investors insisted they relinquish control.
So, while going to investors for capital can lead the business to great success, it can also lead to conflicts with managing your company. Conversely, a business line of credit gives you funding — without having to answer to others. This way, you can build your business in the way you’ve dreamed.
4. A business line of credit has a relatively easy approval process
A line of credit is a solid and accessible financing product for young businesses as well as established ones. Generally speaking, you only need to be in business for at least six months and have at least $50,000 in annual revenue. Keep in mind, of course these terms depend on the strength of your business.
Also, it’s possible to get an unsecured line of credit, which is backed by a personal guarantee instead of collateral or a deposit. This takes a lot of risk out of borrowing for you, personally. However, you should note that unsecured lines of credit may come with a higher interest rate and/or stricter qualifications.
If rates are much better on a secured line of credit, opt for that instead. You can back lines of credit with equipment, invoices and other business assets to get approval and lower rates.
5. A business line of credit works well with other financing options
Different loans work well for different things. As Marco Carbajo, a business credit expert, notes, a business line of credit “provides companies the flexibility needed to meet their short-term funding needs. When the need for cash is there, funds are there.”
Since a business line of credit keeps you secure in the short term, it works well with financing products geared for the long term.
For example, a term loan from the SBA can provide a lump sum of cash to use for business expansion over the next five years or longer. During that time, a line of credit can serve as a supplement when daily cash needs arise.
With a smart loan combination, you can ensure a lack of capital never holds your business back. This allows you to focus on what matters: funding a successful, sustainable company.
Take control with a business line of credit
No loan option is perfect. But there are reasons why a business line of credit is one of the sought-after financing products for businesses. It’s flexible, affordable, accessible for most, and gives borrowers more control.
As long as you do your due diligence and compare options, you can benefit from opening a line of credit. Considering combining with other financing products if needed. You’ll meet all your funding requirements — and you’ll be able to get going on building your business.