When is a Line of Credit the Best Choice for Your Business?
April 26, 2016

When is a Line of Credit the Best Choice for Your Business?

a person opening a lines of credit for their business

All businesses are subject to fluctuations in the market. Although you can make predictions and projections based on past performance, there’s no way to be sure that you’ll always have the money that you need. A business line of credit can cover expenses when cash flow unexpectedly drops off and you find yourself low on working capital.

What You Should Know About Using a Line of Credit for Your Business

In some ways, a line of credit is similar to a credit card. Instead of getting a lump sum up front and paying it back over time like you do with a traditional loan, you borrow money as needed up to a limit set by your lender. Interest is only charged on what you use, and the loan is repaid on a monthly basis. This process is sometimes referred to as a revolving line of credit because of the cyclical nature of the borrowing and repayment process.

Qualifying for a line of credit requires a solid credit score and a good financial track record. Banks often ask for some form of collateral to secure the money that you borrow. Unsecured lines of credit are considered more risky and may have higher fees as a result.

Why Businesses Use Lines of Credit

A line of credit may be helpful if you:

• Need an increase in cash flow to make it through a slow season

• Are facing unexpected expenses that a term loan isn’t appropriate for

• Want to launch a new marketing campaign that your budget doesn’t quite cover

• Are getting ready to stock up on inventory for a coming busy season

• Feel better having a “safety net” in case of emergencies

Keep in mind that the risk involved with lines of credit may make them more difficult to qualify for than other types of loans. However, if you need cash right away, alternative lenders are often able to offer faster approval than banks.

Fees, Interest and Payments Associated with Lines of Credit

In addition to a minimum monthly payment on whatever you borrow, lines of credit may also include maintenance fees and transaction fees. Make sure that you understand what you’ll be paying before taking out a line of credit. These fees, along with the variable interest rate applied to the money you borrow, could amount to more than you initially expected. You don’t want to find yourself in a position where business picks back up and most of the increase in profit goes toward paying off the loan instead of growing your business. Read all the fine print and ask questions to clarify the terms so that you can plan out a payment structure that fits your projected budget.

Whether you know that your business will hit high and low points throughout the year or an unforeseeable circumstance leaves you without a buffer of cash, a business line of credit can help you out. Talk with your bank or an alternative lender to see what options are available and what will work best to keep your business going.

Want to Learn More About Lines of Credit?

At Verdeja, De Armas & Trujillo, LLC, our team of Miami accountants is dedicated to providing personalized, financial guidance. We provide accurate and comprehensive financial statements as well as in-depth business analyses. Contact us today for a consultation!