Every small business faces periods of lumpy cash flow. Savvy small business owners also understand that the best laid plans (or budgets) can fall by the wayside quickly.
Many of them understand that to stay ahead of the curve, a business line of credit is a fast and convenient option to access funds.
What is a business line of credit?
A line of credit is financing designed to get you access to the funds your business needs up to a certain limit. This financing tool allows you to draw up to your limit and pay off the balance on a continuous basis. The key feature of this product is flexibility: to draw anytime, to use for any business purpose, and to reuse next time.
Another way to say it is a revolving loan that gives business owners access to a fixed amount of money, which they can use day-to-day according to their need for cash. Interest is only paid on the amount of the advance they actually-used.
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How does the line of credit work?
The credit line assigned acts as a rainy-day fund for your business needs.
Here’s an example:
Martha’s Gift Baskets receives a $20,000 corporate order, for which material costs are $10,000. Martha thought she’d saved to take on such an order, but she realizes there will be a $5,000 shortfall. Luckily for Martha, she has a $20,000 business line of credit from which she can draw that amount. She pays interest on the amount she withdrew. Once the order is fulfilled and paid, she can choose to continue the installments or pay back the remainder in one go. The $20,000 replenishes and is available for next time.
Why a Business Line of Credit Makes Sense
- Speed: Online lenders can review and approve applications within 24 hours. That can mean cash in your bank account as fast as same day.
- Simplicity: The line of credit is assigned to the business for business use, with no other strings attached. Other loan types have limitations such as the funds can only be used for certain equipment or are secured by certain assets.
- Having quick and easy access to funds can be a game changer for any small business. A business line of credit is perfect for businesses with seasonal sales cycles and monthly cash flow fluctuations. It’s also ideal for businesses that typically have unpredictable, or “lumpy,” cash flow, or need to invest in their business in order to grow.
There are ways to make the most of a business line of credit. Here are some tips
1. Keep your account up-to-date
Perhaps the number one advantage of business credit line is flexibility. You could even choose to not withdraw anything for extended periods.
But with most financing companies, it’s also smart to maintain your account up-to-date. It’s not unusual for a business owner to sign up, draw and then repay funds on a credit line and do nothing for a few weeks or maybe a couple of months.
But if you don’t use a credit line for longer periods, say, a year, and you haven’t updated your account information, the lender may have to again ask you to submit updated information about your business.
That’s because the state of your business may have changed. These could be positive changes that could actually lead to an increase in your credit line. But, of course, there could also be negative trends.
It’s important that the account is active. You can take a draw and let it ride out the six months on weekly installments. If you haven’t been updating your account, your lending partner will likely need to reassess your business before extending a new credit line mainly because the financing you’re getting is tied to your cash flow.
You shouldn’t withdraw funds if you don’t really need to. But one thing to keep in mind: utilizing your credit line regularly may improve your ability to get a credit line increase in the future.
In fact, consistent funding history builds more history allowing underwriters to potentially auto-approve funding requests and increase credit lines.
2. Provide a bank connection
One of the best ways to give a lender an up-to-date view of your business finances is to provide a connection to your bank account.
This allows lenders to view your bank data, and potentially even provide an increase when they see increased financial strength in your business. With such visibility, your account would remain active, and you might even be able to draw the funds you need without having to submit new information.
3. Watch out for liens
A lien is a legal claim on your business or property placed by a lender as a form of security for lending your money. A lien would be the tool used by a lender to make the security interest public. A “security interest” is defined as “an interest in personal property or fixtures which secures payment or performance of an obligation.”
This is common practice in financing arrangements.
But liens could have implications on your ability to get financing to run your business.
For one thing, a lien on your business could mean a cap on the business line of credit a lender is willing to offer. For example, instead of a $50,000 credit line, a lender may decide to offer only $20,000 because of another financing firm’s lien on the business.
Here’s a key point to remember: sometimes business owners aren’t even aware of the liens placed on their business or property. I’ve come across business owners with liens from lenders they have never funded with, and even from lenders who are now out of business. The Uniform Commercial Code (UCC) requires a lender to have authorization from their customer prior to filing the lien. Generally speaking, the customer provides this authorization in financing agreement contracts signed prior to funding.
It pays to be a savvy business borrower. You should check with a lender and ask at what point they’ll file a lien, and if they will provide funding once they’ve filed, or if they will require confirmation from the Secretary of State. Each lien filing must be filed in the borrower’s state of incorporation and every state’s Secretary of State is set up differently, which can impact the time it takes to process the lien filing.
When you end a relationship with a lender, you should always make sure they terminate their lien. It’s also a good practice to ask for a copy of the lien termination, a UCC3, for your own records.
4. Watch out for ‘negative bank events’
“Non-sufficient funds” or NSF or “overdraft” are some bank account notices that are referred to as “negative bank events.” You should try your best to avoid them because these could have an impact on the type of financing you could have access to.
On the other hand, a healthy bank account is usually a positive sign for a lender.
Remember it’s not always about the amount of money you have in your account or the strength of your sales, it’s how you manage your money.
Clients who might not have the strongest sales or income may be able to demonstrate through bank data that they are able to manage their finances very well. They generally don’t have overdraft or NSF notices. Every month, they end on a relatively high balance for their income. That’s something that reflects positively on their business and ability to manage their finances.
Bottom Line
A credit line gives you the flexibility to deal with unexpected twists and turns in running your business. Managing your finances wisely, while keeping your credit line account information updated, is the best way to maximize this type of financing.
| Start Up Line of Credit | Short Term Loans | Long Term Loans | Business Lines of Credit |
|---|---|---|---|
| BitX Funding start-up financing program connects entrepreneurs and business owners with $25,000 – $150,000+ in unsecured business lines of credit. This program can provide you with funding in as little as 10 days and is typically offered with 0% interest financing for the first 6-18 months. | Designed to help meet short-term needs, such as unexpected events, or to take advantage of a great deal. Typically, most small business owners qualify. | BitX Funding offers true long-term business loans with automatic monthly payments. If you are looking to Fund larger projects that pay back over a longer term with rates as low as 5.49% this option may be right for you? | Business lines of credit allow you to draw funds whenever you need. Funds will be deposited directly into your bank account. Repay via automated weekly debits over six months. Your available balance replenishes as payments clear. Lines of credit can go as high as $100,000 with interest rates averaging around 13%. |
BitX Funding is the online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and we are passionate about helping your company reach its full potential.
You can reach a loan specialist by toll-free at 1-800-824-2407, or email at info@bitxfunding.com or applying online here and we can guide you on which loan is the best fit for your business.
