According to a US bank, poor cash flow is responsible for 82%of small business failures.
Well, the figure is really alarming.
It’s pretty unspoken-of that most businesses need to understand and learn capital management. The practices are more focused on obtaining capital.
This is where a business credit line can help.
What Is a Business Credit Line?
In simple words, a business credit line is similar to a credit card. The only difference is that it is meant for corporate usage, as the name suggests.
Another noteworthy feature of the business credit line is – it’s cheaper as compared to a personal line of credit.
Moreover, most banks and creditors offer an unsecured line of credit to businesses up to a specific limit. The limit usually depends upon a business’s credit performance, i.e., credit score and history.
Why Do Businesses Need A Credit Line?
A business line of credit can offer several benefits, regardless of the size of the business.
For example, it can help maintain sufficient capital for a business.
Moreover, it becomes easier to grow and scale a venture if the owners can have access to a business line of credit.
Better Control Over Capital
Traditional loans provide borrowers with a lump sum credit which is to be paid over a fixed tenure.
Contrary to this feature, the business credit line allows the users to borrow as they need.
Unlike traditional loans, a business line of credit offers more control over debts and expenses.
To put this into perspective, let’s consider an example.
A fruit merchant needs capital for the transportation and marketing of the produce. Since the payments that the merchant may receive would usually only be after he makes a sale, he might be running a little short on capital.
In case he has an active line of credit, he may use it as per his needs. Meaning, he may take out a small loan from his credit line to meet his at-time needs. And when he pays it off, the credit limit is restored.
In this way, he would always have a safe capital that he can use in the form of credit. Moreover, the interest he’d be paying won’t be levied on his entire credit limit. But, instead, he’d only have to pay interest on what he borrows.
More Flexibility And Freedom
A business line of credit usually offers a lot more flexibility over traditional forms of lending.
For example, applying for a traditional loan could take days before the applicant would receive the money. Whereas, with an active line of credit, business owners can enjoy more freedom.
Depending upon the line of credit features, business owners can withdraw, make payments, and even spend money on inventory as and when needed.
Apart from this, a business credit line also comes with more flexibility in the payment schedule. Meaning, unlike traditional loans, the borrowers need not pay fixed installments over a term.
Business owners can make payments on their dispenses. When the revenues are higher, they can make more significant payments, and vice versa.
Helps Build Better Credibility
In 2014, according to a survey by federal banks, half of the entrepreneurs were denied any sort of capital from credit lines.
The report also mentioned that no credit or bad credit was one of the main factors for this denial.
Since a business line of credit can help maintain the cash flow, regular payments on loans can help improve credit scores.
Experts believe that an active credit line helps in building credit scores for businesses if the payments are made on time.
Hence, it can offer a dependable source of capital for building better credibility as a borrower.
Besides, having a good credit score also attracts more investors. And it needs no mention that investors only add more value to a business.
Lower Interest Rates
It is noteworthy that most business credit lines follow a prime lending rate model. It means that the rate can fluctuate but still would remain lower than a credit card’s rate of interest.
For business owners who consistently pay their debts on time, the rates tend to stay low. Thus, allowing them to enjoy cheaper access to flexible capital with typically higher credit limits.
Whereas, for defaulters, the interest rates may increase, along with lowering the credit limit.
Nonetheless, the APR is still usually below the average rate of interest for personal borrowers.
Easy Funding For Short-Term Capital Needs
Young businesses often struggle to meet their capital needs. And who can blame them – there are several things that business owners need to focus on, especially during the initial setup of their venture.
It could leave business owners struggling to meet even the smallest of funding needs—for example, utility bills and stationery costs.
Thanks to an active business line of credit, business owners can access quick funds for their short-term capital needs as well.
As a result, they can focus on more critical tasks such as finding new clients or customers.
The Takeaway…
As an entrepreneur, a business line of credit can solve a plethora of your financial problems. From daily expenses to inventory costs and much more – all are within reach.
A business line of credit would mean that you don’t overindulge in financial troubles but can instead focus on productivity.
With lower interest rates and enough flexibility in taking out the loan and repaying it, the credit line is a boon to any business. Besides, it can be a blessing for companies that are struggling with a low credit score. As already mentioned, using the credit line and making timely repayments can actually help improve the credit score for a business.
However, a business line of credit is also a form of debt, which means borrowers would need to repay it, no matter what.
It is, therefore, suggested that the credit line be used wisely.
Making timely repayments and taking out only what’s necessary can help business owners manage their financial situation.
If the credit line can be a boon, it can also be a curse, taking a business towards its decline.