A line of credit can be an ideal funding source for your businesses. With a line of credit, you only pay interest on the amount you borrow, a major benefit that a conventional term loan doesn't offer. Similar to a credit card, a line of credit has a lot of flexibility with usage but depending on what you are looking to fund, it may have some drawbacks.
Why consider a line of credit over a loan?
If your business is in need of funding for cash flow purposes a can be very helpful, if you need funding for a specific large purchase, a traditional loan may be a better option as you will have more time to pay it down in smaller increments. A line of credit is revolving, meaning once you pay back what you borrowed, the cash is available again, instantly, no need to re-apply for funding. This can be leveraged for every day business expenses and help with cash flow. Here are two general examples of where a line of credit would come in handy.
Scenario 1: You sell a product and a customer places a large order and their terms are Net 30 (payment due 30 days after delivery) you need to pay your vendor / manufacturer up front. If you have a line of credit you can tap into it to fulfill the order without having to apply for any further funding.
Scenario 2: It is slow season for your business and you are a few bucks short for payroll, being prepared with a line of credit could help tremendously.
These two scenarios are common and while a line of credit may not be a go-to source for keeping a proper cash flow, there are definitely times where they can save your business from paying high-interest on hard money loans when you need cash quickly. Keep in mind that the occasions when a line of credit is needed most can often be a difficult time to get approved for a loan, getting a line of credit preemptively rather than when it's crunch time is a good idea.
To sum it up, a line of credit is easy and affordable to set up (assuming your credit is good) and can be an incredibly handy resource for your business to have access to.
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