Maintaining Cash Flow With a Revolving Line of Credit
As a business owner, it is your responsibility to know what financing options are available to you. Virtually all businesses need to borrow capital at some point. It is usually unavoidable, but it can be much more manageable if you know the different types of financing and what situations are best for each. One of the most common financing options is a revolving line of credit.
Like all types of financing, a line of credit has certain advantages and disadvantages that make it suited for certain circumstances. The main advantage of this kind of credit is its flexibility. If your business has uneven income, with slow months and busier months, a revolving line of credit can be used to even it out. It works similarly to a credit card. You take out a line for a certain amount, say $75,000, and you can spend any amount up to the limit. This means that if you only fall $50 short for one month, you can borrow $50 and only have to pay that much back, then you could borrow thousands of dollars the next month. That is why it is so useful for fluctuating businesses, you would not have to know exactly how much you need to borrow.
Another advantage is that a revolving line of credit is open ended. Rather than borrowing a set amount of money, then spending the next few months or years paying it back, and then being finished, it is a continuous source of capital. As long as you keep making your payments, you can take advantage of it for as long as you need to. This is especially nice for businesses that are just getting started and will need several months to get their income stream stable enough for them to stand on their own.
Of course, it is just as important to understand the disadvantages of any type of financing. Lines of credit are far less structured than a loan, so it is easier to accidentally overspend without realizing how much you will need to pay back or when payments are due. This makes discipline vital for any business owner considering a credit line. They are also more difficult to qualify for. It is riskier and less convenient for the lender, so they are more selective than a normal loan. You will need better creditworthiness and the ability to prove your business is stable.
Whatever your financial needs are, be sure to research your options carefully beforehand. If your needs match the advantages, consider taking out a revolving line of credit.