Why a Business Line of Credit Is Important for Every Business?

Business lines of credit help all companies.

There are businesses that mistakenly believe they have no need for a business line of credit. Often, having no inventory, few accounts receivable, or enjoying strong, consistent cash flow, these companies fail to recognize the need for, at least, a modest credit line. Actually, all businesses can benefit from a reasonably priced and easily accessed line of credit. Here are some important reasons why every business should have one.

Function

A business line of credit guarantees the availability of funds whenever needed, regardless of the health (or lack thereof) of a company's cash position. Typically, a business can access their credit line with one phone call or simply writing a check on their loan account. Designed to provide funds for operations needs and cash emergencies, business credit lines function for all companies, large and small.

Misconceptions

Those with small businesses or organizations that primarily deal in cash sales often are blind to the need of a line of credit. They also often believe that they probably do not qualify for this financing and/or assume it is too expensive for their size or needs. These assumptions are usually incorrect. Most legitimate businesses will qualify for a line of credit, however modest, and, unlike some other borrowing options, commercial lines of credit are seldom expensive. They are often free of points, closing costs or other fees.

Features

Business lines of credit are normally designed for ease of access and repayment. After all, the lender wants their business borrowers to use the financing. Having outstanding balances are the only way for banks, credit unions and private lenders to generate income from interest. Repayment options are usually equally convenient, allowing the borrower to reduce outstanding balances quickly, freeing up more funds should they need them. Typically a telephone call or Internet banking payment are all that is necessary to access funds and pay interest or pay down principal.

Considerations

Businesses should consider the wide variety of uses for credit lines. For example, a company has the opportunity to buy new equipment at "fire sale" prices. While originally planning to wait another six months to accumulate cash, a line of credit allows them to save large dollars and purchase identical equipment at a fraction of the projected cost. Another common consideration is an unexpected loss of a large client or customer. In many businesses, losing a long-term important customer creates cash flow nightmares until a comparable "replacement" customer is found. Should this take months, a business line of credit could be a company lifesaver. Consider all potential situations, both positive and negative, including emergencies, for which a credit line might be welcomed.

Significance

Business lines of credit are used by the smallest home-office enterprises to the largest Fortune 100 companies. Typically, the number of commas and zeros is the primary difference between the smallest and the largest organizations. The purpose and basic structure are usually identical. Business credit lines help "smooth out" cash flow, provide the ability to take advantage of profitable opportunities when they appear, meet emergency cash needs and allow the use of OPM (Other People's Money) for income-producing situations.

References

• Reasons to Have a Business Line of Credit
• Understand the Importance of Business Credit Lines
• How to Get a Business Line of Credit

Resources

• Sources of Small Business Lines of Credit