What You Should Know Before Getting a Business Line of Credit
Many new business owners think they only need to worry about funding while they’re getting a business off the ground, but the reality is that consistent cash flow is key to a healthy business, and all sorts of things could impact it. If you’ve found that your business is seeing gaps in cash flow that could benefit from some outside funding, business lines of credit could be useful tools for your company. Here’s what you need to consider.
How a Line of Credit Works
A line of credit functions similarly to a credit card. A business is approved to borrow up to a certain amount, and the company can borrow from that line when it needs cash. When that cash is paid back, plus any fees and interest, the full amount is available again. This is a great way to utilize flexible financing for your different business needs. With these funds you can pay employees, buy inventory, pay rent, and more.
A line of credit can be a quick and convenient method for a quick injection of cash, but it’s important to note that getting one can be extremely difficult if you don’t have the right qualifications. You need excellent credit, which may be difficult for a business if it hasn’t been up and running for long. You need evidence of enough cash flow over time to prove that you’ll be able to make payments, and you’ll also need some sort of collateral in case you can’t pay. If your business doesn’t meet these qualifications, you may be able to use your personal assets, but many business owners may be uncomfortable with the risk.
Maintaining Your Account
Getting a line of credit isn’t easy, and maintaining one may be harder than you think. Many lenders have yearly requirements that your business must meet, or they’ll close your line. These requirements vary, but it’s generally a good idea to make sure you’re maintaining the financial health of your business and making your payments on time. Some lenders only want you to spend the money on certain things, so make sure you’re keeping up with any changes to your agreement. If you ever want to raise your borrow limit, it’s important that you remain in good standing.
While tricky to attain and maintain, lines of credit can be a great tool for companies with a regular slow season. You can keep your business running and maintain a healthy financial portfolio as your business grows.