Every small business faces periods of lumpy cash flow. Savvy small business owners also understand that best-laid plans (or budgets) can fall by the wayside quickly. Many of them understand that a business line of credit is a fast and convenient way to access funds to stay ahead of the curve.
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 specific limit. This financing tool allows you to draw up to your limit and pay off the balance continuously. The key feature of this product is flexibility: to draw anytime, use it for any business purpose, and to reuse it next time.
In other ways, a revolving loan gives business owners access to a fixed amount of money, which they can use daily according to business needs. Interest is only paid on the advance they 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 realized there would be a $5,000 shortfall. Luckily for Martha, she has a $20,000 business line of credit from which she can draw. She pays interest on the amount she withdrew. Once the order is fulfilled and paid, she can 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 the same day.
- Simplicity: The line of credit is for the business for business use, with no other strings attached. Different loan types have limitations, such as the funds can only be used for specific 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 with unpredictable, or “lumpy,” cash flow or need to invest in their business 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 the business credit line is flexibility. You could even choose not to withdraw anything for extended periods.
B For many financing companies, it’s wise to maintain your account up-to-date. It’s not unusual for a business owner to sign up, draw and repay funds on a credit line and do nothing for a few weeks or maybe a couple of months.
Suppose a credit line has not been used for a long time. The lender may ask you again to submit updated information about your business.
Because the state of the business could be changed, and these can be positive changes. It could lead to an increase in your credit line. But there could also be a negative trend as well.
the account must be active. You can take a draw and let it ride 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 your financing is tied to your cash flow.
You shouldn’t withdraw funds if you don’t 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.
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 connect 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 submitting new information.
3. Watch out for lines
A line is a legal claim on your business or property placed by a lender as a form of security for lending money. A line would be a lender’s tool to publicize the security interest. A “security interest” is “an interest in personal property or fixtures which secures payment or performance of an obligation.”
This is standard practice in financing arrangements.
But lines could affect your ability to get financing to run your business.
For one thing, a line 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 offer only $20,000 because of another financing firm’s line on the business.
Here’s a key point to remember:
Sometimes, business owners aren’t even aware of the lines on their business or property. I’ve come across business owners with lines from lenders they have never funded and even from lenders who are now out of business. The Uniform Commercial Code (UCC) requires a lender to have authorization from their customer before filing the line. Generally speaking, the customer provides this authorization in financing contracts before funding.
It pays to be a savvy business borrower. You should check with a lender and ask at what point they file a line and if they provide funding once they file. Or if they will require a confirmation from the Secretary of State. Each line 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 line filing.
While ending a relationship with the lender, it is essential to complete its line. For your record, asking for a copy of the line termination is good.
4. Watch out for ‘adverse bank events’
Non-sufficient funds (NSF) are some bank account notices that need to refer to as adverse bank events. You should try your best to avoid them as they can impact the type of finances you have access to.
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.
The clients cannot have the most robust sales or income. They might be able to establish their bank data to manage their finance. They might not have an overdraft or NSF notice. Every month, they end on a relatively high balance for their income. That reflects positively on their business and ability to manage their finances.
A credit line allows you to deal with unexpected twists and turns in running your business. Manage your finance wisely and keep your credit line account information up-to-date. This is the best way to maximize this type of finance.
BitX Funding is an 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 are passionate about helping your company reach its full potential.