There will eventually come a time when your business needs access to additional working capital to drive growth and profitability. It doesn’t matter how large your company is or if it has a long track record of proven success. Urgent unplanned expenses invariably come up, and this is when companies need short-term financing solutions the most.
Should you experience an unanticipated expense shortfall, an injection of working capital can make all the difference between your business pulling through a temporary rough patch and thriving again or shuttering its doors permanently. If you’re just now starting to search for business financing, you’ve assuredly discovered an array of available options. Among the most popular choices for accessing working capital is a business line of credit.
In this post, we’ll explore the defining features of a business line of credit before briefly reviewing a few case studies that illustrate why this type of financing is likely the best choice for your company.
What is a business line of credit, and how does it differ from a term loan?
How does a business line of credit work? A business line of credit functions like a revolving consumer trade line in the sense that you’re giving a predetermined credit limit you can borrow from as needed and pay it back later, possibly with interest. Use can then use the remaining credit again to make future purchases. Credit lines are dissimilar to term loans because you can continuing access funds as long as you have available credit.
What is a business line of credit used for, and how is it different from a term loan? A term loan is usually dispersed in one lump sum, and it’s less effective as a solution for working capital than a business credit line. You can use credit lines to purchase supplies, boost inventory, and cover other operating expenses as you need them before paying the revolving balance down later as the funds become available. Unlike a term loan, once you reduce the credit line’s existing balance, you can always access that same amount of credit again.
A term loan includes a fixed monthly payment, while payments toward your business credit line are determined by the balances you carry on it and your borrowing limit. You can pay your revolving line of credit down anytime, and, dissimilar to many term loans, this would not entail a prepayment penalty.
How do lines of credit benefit small businesses?
Every small business should have access to an emergency source of capital to cover its expenses in the event of an unexpected shortfall. In the case of a widespread economic downturn, business owners may discover credit conditions tightening. This means that access to other forms of working capital, such as asset-based or cash flow-baed loans, will be restricted, and the additional funds could be difficult to come by.
There could be other times when you find yourself waiting on a client to pay a large invoice, and it just doesn’t make sense to go through a lengthy loan application process, just to cover your ends for a few weeks. This is where a business line of credit comes in handy. You’ll have immediate access to working capital when you need it.
Businesses may also find that they need to access critical resources, like new machinery and equipment, the cost of which exceeds their excess capital, within an extremely narrow window of time. If they don’t have the excess funds to invest in these assets, they could miss out on steep discounts, and even risk falling behind their competitors who managed to successfully implement the new solutions.
If you’ve established a line of credit, you can meet unexpected challenges head-on and swiftly pay the revolving balance down as you realize a fast return on your investment. Leveraging a business line of credit to take advantage of new opportunities and implement the latest technology is a common practice among small businesses that aim to grow and maintain a competitive posture in their respective industries.
Businesses access their lines of credit for:
- Increasing their workforce to meet demand
- Acquiring more real estate
- Covering payroll after an unexpected shortfall
- Purchasing additional stock
- Marketing initiatives
Companies that are subject to seasonal fluctuations in demand often use their lines of credit to meet their financial obligations during slow months and handle other issues like labor shortages during times of peak business. Credit lines are among the best tools for managing market volatility a business can have.
Revolving lines of credit for business are simple to use and give you fast access to funds when you need them most. If you’re accustomed to using consumer credit cards, business credit lines work the same way. It’s easy to replenish your available credit and access it again when you need it.
Secured vs. unsecured business credit lines
Not unlike other loan types, business credit lines are separated into two types of credit: secured and unsecured. A secured line of credit is staked in the borrower’s collateral assets while an unsecured credit line requires no collateral. Most businesses prefer the latter because it doesn’t place their assets at risk.
Of course, lenders offer more favorable terms when collateral is involved because they can use it later, should the borrower ever default. There are pros and cons to both financing types. That’s why it is crucial to discuss all options with your lender to determine which product is best for meeting your business requirements.
Business lines of credit from New Bridge Merchant Capital
Opening a new business line of credit is a convenient and effective strategy to ensure you always have access to sufficient working capital. Consider applying for a business line of New Bridge Merchant Capital by reaching out to one of our senior business financing specialists now.
