Getting a Line of Credit for Your Small Business
by Leeia Ladipoh on October 3rd, 2007
One of the buzz phrases that will often come up in small business dialogue is the business line of credit. This is basically an amount of money forwarded by a financial institution (usually a bank) which the business owner can use at her or his discretion for business expenditures.
There is usually a cap on how much the business owner can spend, such as $100,000, but any amount up to this can be used. In this article, we will take a look at some of the advantages and disadvantages of business lines of credit. Hopefully, you can use this information to decide whether or not a small business line of credit is a good option for your own business.
* A line of credit can be used to finance gaps. If you own a small business where your cash flow is likely to become tied up in accounts receivable or in inventory, then a line of credit will be handy until you receive the cash for your services or sell your goods. It is not uncommon for financial gaps to occur in a business year, and having the cash on hand to cover expenses in the meantime is always nice.
* Interest charges can add up! On the other hand, this money isn’t the same as if you had cash in hand, mainly because you are being charged for borrowing the money. These charges are in the form of interest, and the rate will depend on the financial institution you are using. These interest charges can really start to add up – so if you don’t need to use money from the line of credit, don’t. If you do, try to cover the cost of the interest, either through the price of your inventory items or by adding an interest charge of your own to your accounts receivable.
* Full disclosure is needed for the highest amount. It sometimes seems as though our world revolves around credit, and in order to be approved for more you have to prove that you make the money to cover it. If you prefer to keep your books closed to official eyes, it can be very hard to secure a line of credit. Small business owners do give up some of their business privacy with such a loan.
* All that money can be tempting. One of the biggest mistakes that small business owners make with a line of credit is to use the money to fund a project that will not be completed in a timely manner. As noted above, the interest rates on a line of credit add up quickly, and the last thing you need is to have a lot of extra charges incurred by having too much money out for too long. Keep your borrowing small, and don’t try to grow faster than your cash flow can keep up!
In short, a line of credit should only really be used when there is every chance that you will be able to pay back the money in the short term. If your cash flow is assured, a line of credit can help you cover gaps in the finances until the money arrives. I all other cases, a line of credit may end up costing you more than it can help.