Companies need capital. They need money to take care of payroll, advertising, taxes and countless other little things that pop up during the month. Equipment can break and require repairs unexpectedly, also demanding additional funds from the operating budget.
The big question is where a business can get those needed funds. Using money in savings can quickly deplete emergency funds and leave the business stranded when the going gets tough. A better solution is to use flexible financing such as business lines of credit to handle the limitless day-to-day operations of the business.
What Are Lines of Credit?
There are several options for getting credit, including business credit cards or direct credit from suppliers. A business line of credit works similarly but offers several advantages over these other options.
When you get approved for a line of credit, the lender authorizes you to withdraw a set amount of funds as needed. These funds have a cap. You only pay interest on the amount of money you use, and you have a certain amount of time to pay back the funds before late fees are calculated.
How Does a Line of Credit Work?
A line of credit operates on a revolving basis, which means that as you repay your credit amount, funds become available again. Imagine that you have a line of credit worth $10,000, and you purchase $6,000 in inventory. You repay $3,000. That means you would have a total of $7,000 available still to use, or $10,000 once you’ve finished paying off the previous balance.
One of the best parts of having this type of credit is that you don’t need to request authorization from the bank afterward. If you see a piece of equipment you want to buy, you can do it right away. You can use the funds for advertising, paying suppliers, hiring new employees or taking care of anything else your business requires.
What Are the Advantages of Business Lines of Credit Versus Other Financing Options?
Compared to a credit card, a line of credit generally gives you access to a larger amount of funds. Credit lines typically have lower interest rates and better terms for repayment/late fees as well. Unlike direct credit from suppliers, you can use your line of credit at any business you want, shopping around for great prices and saving money.
It’s not surprising this financial tool is so popular. It’s something virtually every business can benefit from.