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Why Small Businesses Need Lines Of Credit

Financing Blog
Why Small Businesses Need Lines Of Credit

Why Small Businesses Need Lines Of Credit

A revolving line of credit is a relatively common debt financing tool for many small companies. However, there are also a certain percentage of firms that are not quite sure of how to take advantage of business lines of credit. If yours falls into this category, you may want to learn more about them, especially if your firm has cash flow issues on occasion.

A line of credit is mainly used on a short-term basis and is often relied on to finance working capital when a company, for a variety of reasons, is cash poor. For instance, it can be used when scheduled receivables are late yet operating expenses (like rent or payroll) are due. A line of credit can also be used to take care of seasonal or short-term expenses such as inventory purchases or investing in equipment. Some businesses also use them to take advantage of a discount offered by a supplier or to pay bills, which would otherwise have interest added on.

There are usually no fees to apply for one, and it also doesn’t generally start accruing interest until you actually start using it. As such, there is no immediate cost to get a line of credit. So, once you’ve been approved, the lending institution makes the funds available which you can then use on an as needed basis. After that, you typically begin paying interest on the balance on a monthly basis. Once it has been paid back, the funds are then made available for future lines of credit.

Businesses, however, that top out their credit line quickly and can only make the minimum monthly payments, should be cautious in applying for one. Otherwise, it could up end up draining your cash flow too much, along with not being able to make much of a dent in the principal.  As a result of stressing your business’ balance sheet, it could also hurt your ability to acquire other types of credit in the future. Thus, you want to make sure that you can utilize a line of credit in the correct way.

The key factor to lenders granting one is usually based on the strength of a company’s cash flow. They also often want to see that the company has a steady flow of receivables, its credit history and assets.

Conventional wisdom states to not wait until you need lines of credit to apply for them. Contact an online lender today for specific details on how they can meet your business needs.

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