When it comes to running a business efficiently, cash rules everything. Although every business owner knows this to be true, accumulating cash isn’t always the easiest thing to do – especially in your early years. To stay afloat, many turn to lending products like loans and lines of credit. While beneficial, the best way to prevent borrowing from becoming a problem in your business it is best to educate yourself on the financial product, how to use it, when to consider it, and more importantly how to be responsible with it. Below, is some information on business lines of credit.

What is a Business Line of Credit?

Business lines of credit are revolving loans. They provide eligible applicants with ongoing access to a fixed amount of money. These funds can be used to meet the short-term needs of your business like purchasing inventory, making repairs to equipment, marketing campaigns, and beefing up cash flow during down times. There are two types of business lines of credit:

– Secured – These types of loans require applicants to provide some form of collateral to secure the loan. Collateral to be offered up could be inventory and accounts receivable. Since you’re providing collateral, you’ll find that secured business lines of credit rates are lower than unsecured lines described below.

– Unsecured – Unsecured business lines of credit do not require assets. These are typically harder to get approved for as a startup as you’ll need to have a good business track record to qualify. Keep in mind that because of the higher risks, unsecured business lines of credit rates will be a bit higher and you may also be approved for a lot less.

How Do Business Lines of Credit Work?

If approved for a business line of credit you will automatically receive access to the agreed upon amount of money. Customers will receive a monthly invoice detailing the amount of the lie used as well as interest charged. Unlike a loan which provides set interest rates and payment amounts, your interest rate and repayment amounts are solely based on the amount of funds you’ve used in a given month. After the monthly amount has been paid, you’re able to reuse the funds again.

What are Valid Reasons to Consider a Business Line of Credit?

There are a lot of valid reasons to consider taking out a business line of credit. In a nutshell, if your business regularly requires access to cash to meet small business needs then having a line of credit you could access would make sense. Below are some examples of when to consider applying for a line of credit:

  • If you have a seasonal business who has cash flow troubles during the off-season.
  • If you need to fund your marketing campaign to attract new business.
  • If you’re having trouble with customers repaying inventory and need cash to cover expenses until they pay.

Tips for Keeping Your Business Line of Credit in Good Standing

A line of credit is an endless financial resource that can be used over and over again to deal with short-term day to day operations. Messing up this resource by failing to pay or mismanaging the account would reduce your chances of being approved in the future and worsen your business finances. Below are few tips to keeping your business line of credit in good standing:

  • Pay down on your balance as often as you can to keep the credit limit as high as possible and to show lenders you can be trusted.
  • Never use a line of credit to cover operating losses, as you won’t have the means to repay it.
  • Only use the line of credit if you know you’ll be able to repay it in the near future
  • Be mindful of maxing out your line of credit
  • Communicate with lender should you fall on hard times to avoid negative marks on your business credit history

Being approved for a business line of credit can prove invaluable to your business. It is a great financial resource that can be used to further grow your business. From covering gaps in seasons to providing the funds necessary to handle day to day operations the right line of credit can help do more than just keep your business afloat. They can help you take your business to the next level and beyond.