2017-03-01 00:00:00 Funding and Financing English Find out why a line of credit may be ideal for improving businesses' cash flow, and learn how to qualify for a line of credit. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Business-owner-recieving-a-reciept-for-business-purchases.jpg https://quickbooks.intuit.com/ca/resources/funding-financing/improve-cash-flow-line-credit/ Improve Your Cash Flow With a Line of Credit

Improve Your Cash Flow With a Line of Credit

2 min read

In an economy that is just beginning to gain its footing, many small businesses are having a difficult time gauging their cash flow needs. An improving economy increases the need for inventory and operational capacity, which requires capital a business might not have on hand. Without a steady and reliable source of capital, many businesses have to forgo new opportunities. Businesses with seasonal demands are constantly challenged with cash flow fluctuations. The ideal solution for business owners may be to open a business line of credit for quick access to cash in anticipation of their needs.

How a Business Line of Credit Works

With characteristics similar to a revolving credit card and a home equity line of credit, a business line of credit provides the ultimate in flexibility and control for business owners who can effectively manage their cash flow. Like a home equity line of credit, a business line of credit establishes an amount of credit from which a business can borrow any time, for any amount, and for any reason. Some banks offer lines of credit that require interest-only minimum payments, which are based on variable interest rates. Interest charges only apply to amounts borrowed, so, as the principal is paid down, the interest expenses decline. Other banks may require a scheduled repayment period of one to three years. The amount of credit that is made available is based on criteria related to the revenue history and current financial condition of the business. Financial stability, strong cash flow, and a profitable outlook are key factors used in determining how much credit is issued.

Why a Business Line of Credit May be Your Best Option

Unlike a loan, which requires your business to borrow a lump sum, a line of credit allows you to borrow only what your business needs. This is ideal for small businesses that need to control their interest expenses. Once the line of credit is established, your business can have unfettered access to capital for any purpose precisely when it is needed. The line can be paid down during periods of strong cash flow. For seasonal businesses that can project cash flow cycles, it can be an effective cash management tool. For businesses ramping up operations, it can seed growth in anticipation of increasing revenues.

Qualifying for a Business Line of Credit

Established businesses that can show a history of steady revenues and sound business management are good candidates for unsecured business lines of credit. Banks will consider your personal credit and business credit as well as your financial standing. If your business is relatively new (three years or younger), with little in the way of an earnings or credit history, you could apply for a secured line of credit as the owner of the business. A secured line of credit is backed by your personal assets as collateral. A business line of credit offers small businesses quick access to capital with greater flexibility for controlling costs and managing cash flow. If you or your business cannot qualify for a bank line of credit, you could consider alternative lending sources available online. You will pay more in interest costs, but you will still have the flexibility and control of how and when your business can use the money.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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