As any business owner knows, it is inevitable that you continually will need to secure financing to keep your business running. One way to do this is through receiving a business line of credit. It is a preapproved short-term loan which you don’t have to reapply for every time you need money. You can withdraw funds from it whenever necessary as long as you don’t exceed the maximum amount. It is imperative that you know when to use and not to use it in order to stay out of financial trouble.
When to Use a Business Line of Credit
- To maintain daily operations. Extra funds are useful in keeping up with everyday affairs, such as managing your payroll and stocking up on inventory.
- To stabilize inconsistent cash flow. Your account may experience dramatic cash flow ups and downs throughout the year. This reality is even more likely if you specialize in seasonal or industry-specific products and services. Financing will help get you through those droughts so you can still purchase materials and ship goods before receiving payments from customers.
- To pay short-term unanticipated expenses. Business can be unpredictable, and it isn’t always possible to be financially prepared for unforeseen circumstances. Knowing you are able to secure right away the funding you need decreases your worries.
- To take advantage of discounted prices from your suppliers. Sometimes suppliers offer discounts if you immediately pay your bill in full. A line of credit can give you the money you need to make such a large payment.
- To jump at unexpected business opportunities. Not all unpredictable circumstances are bad. You may find yourself given a great deal on materials or having a large order that needs to be completed quickly. You can accept those favorable situations with quick cash from your credit line.
When Not to Use a Business Line of Credit
- To purchase equipment or property.
- To expand your company.
- To cover any long-term expenses.
It is not recommended that you use your credit line for any prolonged cash shortage. Your lending agreement may entail a demand loan, meaning that the financial institution can demand at any time that you pay your outstanding balance in full. Also, using up all your credit will prevent you from being able to get money the next time you need it, and you will have to turn to other types of loans.
Getting a business line of credit before you need it is a wise move to make. It can help you sustain day-to-day business duties, survive unexpected problems, and be prepared for promising opportunities. Understanding when you should and shouldn’t use it will ensure you make smar