Small companies need to look at a business line of credit as critical infrastructure
Just about every company, not matter how well run, will at one point or another experience cash flow issues. Factors could include riding out an unexpected downturn due to weather, needing to buy a new computer after a hard drive crashes, or purchasing extra inventory and hiring additional help for the holiday season.
For many companies, having a small business line of credit is the best solution for short-term cash crunches according to online lender, Biz2Credit. A credit line is basically a separate bank account from which a firm can access cash when it is needed. The cash infusion can ranges from as little as $10,000 to as much $1 million or more. Often, the lender is a bank, which makes the money available until the borrower needs it. The business owner pays interest charges only when he or she taps into the cash.
For instance, an IT firm could apply for a $100,000 line of credit and then use the money to hire staff for an upcoming project that begins at the start of the year. While the new employees are being trained, they become a cost and negatively impact the company’s bottom line until the project begins. If the IT company uses $30,000 to recruit, hire and train new employees, it must then pay back the amount borrowed ($30,000) plus interest.
Currently, interest rates for business lines of credit are as low as 7 percent, but can go higher. The cost of capital is so much lower with a line of credit than it is for a business credit card. Additionally, funding decisions are usually made quickly, sometimes in 24 hours.
Credit card companies sometimes offer cash advances to existing customers. In essence, they are providing a line of credit, too. The interest rates charged for advances likely will be significantly higher than for a business line of credit.
If a business is looking to make a major purchase, such as real estate or equipment, an SBA loan or a traditional small business loan could be the best solution. Term loans can be obtained for large sums of $1 million or more, and the payments are spread out over a period of years. In September 2017, big banks granted nearly one-in-four funding requests, while smaller banks approved almost half of the loan applications they received. These are some of the highest approval percentages we have seen since the Great Recession. Money is flowing right now.
Having a solid track record of repayment is important for any business owner who wants to borrow money. The better your credit rating, the lower the interest rate you will be charged.