When should your business consider a line of credit?

Before you can really understand when you should apply for a line of credit, you need to understand what a line of credit can be used for. If you know what it is used for, you can then decide if you need a line of credit.

A line of credit can be used for just about anything. You can use it to pay your employees, you can use it to buy equipment, you can use it to fund your marketing. Really, once approved, you have full range of your line of credit use. You can do whatever it is that you need to do with it. However, it has to be business related.

So, if you find your company in need of money to buy supplies and equipment to operate, or to pay for a website, or anything else you need for your business, you need to consider a business line of credit.

So, why would you use a line of credit as opposed to a traditional business loan? There are a lot of reasons, but the biggest reason is simply that a business line of credit has greater flexibility than other loan options. If you pay down most of your loan and find your company needing money again, you have to re-borrow money. You have to re-apply. You have to pay loan origination fees again, and more. However, with a line of credit, you have a "borrowing space" meaning you can borrow money, pay it back, and borrow it again as long as your line is open. It is a lot like a credit card, but with better interest, and better terms. Another great thing about business lines of credit is that you are able to increase your loan amount to fit your company's needs, and you only have to pay interest on the money you use. A line of credit is similar to a business credit card. You are the one in charge of this account, therefore you determine where the money is being spent, and how much to borrow, and when.

A business line of credit can really help your company. In fact, one of the greatest benefits to a business line of credit is that it will cover cash flow shortages and help purchase seasonal inventory, or pay for costs that you did not plan on. Without flexibility in your cash flow situation, your company could really be in a bind.

A business line of credit is also faster to get than a typical loan. In order to establish a business line of credit, you have to have some financial payment records, and a decent credit score. However, once applied and approved, you can get funded within a few days.

Most business owners wait 2 or 3 years before obtaining a business line of credit. This is smart because it gives you a chance to prove your ability to repay loans, and thus will get you better rates and higher approval amounts. Waiting shows that your company is established and shows where you have been and where you are planning on going. Having a positive company image will go a long way in helping you to obtain a business line of credit.

It is best to obtain a business line of credit before your company is in an emergency state for cash, and not rely on it for things you do not need it for. A business line of credit is wonderful for a start-up company as you can gain capital quickly. Not only does a business line of credit give you the capital you need, it also helps eliminate many of your company's cash flow problems. So, use them wisely, and do not apply for one if you do not need it as the temptation to max it out and get in over your head could be too high.