It’s a sad but true fact that all small business owners have faced a cash crunch from time to time. Maybe that big client promised “the check’s in the mail” but didn’t deliver just as payroll time rolled around. Cash flow is the lifeblood of a small business, and there are any number of reasons why a small business could suddenly face a cash crunch. That’s why it pays to have access to a small business line of credit.
Here are just a few of the pros:
1. Quick access to funds – When you’re facing a cash crunch, you don’t have time to apply for a loan. You need cash fast. Access to a small business line of credit makes that money available to you for short or longer term needs.
2. Cover seasonal or temporary expenses – Did you have an emergency like breaking a computer? Your small business line of credit is perfect to back you up in an emergency.
3. Only pay interest on what you use – Also as opposed to a loan, with a small business line of credit you only pay interest on the amount you use. So if you have to draw on your line of credit to get over a temporary cash crunch, you’ll only pay interest on the amount you withdrew until you can pay it back. With a business loan, you’re paying interest on the entire amount, even if you don’t use all the funds at once.
4. Usually unsecured – Most small business lines of credit under $100,000 are unsecured. This means your money and collateral stay free and you can use them for other things.
5. Overdraft protection – Since your banking relationship is a factor in granting a small business line of credit, you’ll generally find that you’ll open your small business line of credit with your regular bank. Doing this offers an additional perk in that your small business line of credit can also offer overdraft protection should you accidentally spend more than you have in your business bank account.
6. Peace of mind – Even if you rarely or never need to draw on it, knowing that you have access to backup funds can give a busy small business owner peace of mind.
Before opening a small business line of credit, your bank will want to see that you have been in business for at least 2 years and have positive cash flow. Because of this, it’s often easiest to open your small business line of credit with the same bank where you normally do business.
To apply, you’ll be asked for information identifying yourself and your business, as well as your business ownership type, number of owners, gross annual revenue and information about your current cash flow.
When used wisely, a small business line of credit has many perks and few downfalls, and is often a smart move for a savvy small business owner.