If you’re running a small business, you know how difficult and complex that can be. You’ve got to be on top of everything, an expert in anything, and there’s generally not too many people that you can call on for advice or assistance.
One of the most important aspects, and perhaps the one that most small business managers are least qualified for, is the financial management requirements.
Effectively managing your cash-flow, knowing how to access short-term credit or financing when you need it, and keeping your accounts up-to-date and in order isn’t easy or much fun, but getting it wrong is one of the main reasons that will cause a small business to fail.
Before making any major financial decisions, you should always seek independent advice and expertise, but one of the financial tools that you may want to consider is a business line of credit.
A business line of credit can give your business access to additional funds that can help you to maintain inventory, fulfil emergency orders, and meet any other urgent obligations. Think of it almost as a safety net for your cash-flow – giving you extra capacity and flexibility when you need it most.
Why is a line of credit important for a business?
When your financial provider is setting you up with a business line of credit, they will set a maximum limit that you can borrow against at any time you require. Fees and charges will vary between providers, but most likely there will be some sort of application fee, plus a monthly or ongoing maintenance fee. You will also be charged interest on any funds that you draw down from your line of credit, so it’s important to ensure that you have the lowest interest rate possible in order to minimise the costs involved.
Unsecured lines of credit for small business can be subject to high interest rates. Lower interest rates will be available if you have assets against which you can secure your business line of credit. However, if you are unable to meet the repayments required, then you may be placing those assets at risk.
A business line of credit shouldn’t be seen as a source of emergency cash when things aren’t going well. Make sure that you apply for your business line of credit when the business is in good shape – you may need the flexibility it gives you to get through some difficult periods, but financial providers are more likely to be able to assist you with a business line of credit if you’re in a strong, stable position.
The importance of finding the right small business loan
A business line of credit is different to a small business loan – which is another type of product that your financial provider may discuss with you.
Quick business loans aren’t necessarily that easy to find, they’re generally something that you need to plan for in advance as they’re not really designed for short-term cash-flow requirements.
Small business loans are designed so that you borrow a lump-sum to fund specific business purposes. The interest rate will vary, and it may be a fixed or a variable interest rate.
Small business loans are generally structured so that you draw down all of the funds at the beginning of the loan, or there may be staged draw-downs built in.