Benefits of Business Lines of Credit
Most business failures (82%) are the result of poor cash flow management. As a business owner, you know how careful you have to be with your cash, making sure that you can pay your short-term debt and expenses. It is easy to make one wrong move and become cash short for a month or several months. This is where business lines of credit can help. These are a few benefits of adding this type of credit to your financial arsenal, especially during periods of growth.
These credit accounts can be used for any purpose. Unlike traditional loans, which are secured for specific purposes, you decide where to use this money. If you have a big order that isn’t paid for yet and you need to purchase the raw materials, your credit can help. You can also pay operating expenses or salaries.
Many traditional loans require specific payments each month. This payment doesn’t typically change unless your interest rate is adjustable. However, lines of credit have flexible repayment options, so when you are experiencing high revenue, you can pay higher payments, and when your revenue is down, you can pay lower payments, as long as you pay your minimum payment. This is great for seasonal companies.
Tools for Credit Building
These credit lines also help your business build its credit score. Companies, like individuals, must build their credit. In fact, many banks won’t even lend to companies without high credit scores. A 2014 survey of federal banks only extended any financing to half of the entrepreneurs who applied for a loan. You will need other financing sources at some point, and these credit accounts can help you look more appealing to the bank.
Quick Access to Money
These accounts are set up so you can borrow and pay back constantly. Therefore, as long as you have available credit in your account, you can access it almost immediately. This is especially important in business, where you may need to get equipment serviced or funding a new project.
These credit accounts also typically have low interest rates. Although these unsecured credit accounts use the prime lending rate, which fluctuates, your interest rate on these types of accounts is much less than credit card interest, which can reach 27% or more. As long as you are responsible with your payments, making sure they are on time and you at least pay your minimums, your rate will stay low, resulting in cheap capital.
Business lines of credit are great cash flow tools, but they should be used responsibly. Investigate how these accounts can help your business.