As an entrepreneur, you probably already know that businesses need consistent cash flow in order to thrive. However, you probably also know that there are good days and bad days, and sometimes the bad days last longer than you like, which leads to a cash squeeze every now and then.
A business line of credit (BLOC) can help you in such a crisis. Through this type of business funding, you can resolve your cash flow woes and have access to the working capital you need.
Here are the specific reasons why every entrepreneur should open a business line of credit.
1. A business line of credit is revolving capital
A business line of credit works like a credit card, except you can withdraw cash up to a predetermined limit. You can withdraw funds as needed, unlike with loans where you get a lump sum upfront.
For example, if you have a credit limit of $30,000 and you withdraw $5,000, you will still have $25,000 available to use. Once you pay back the $5,000 you borrowed, your credit limit goes back to 30,000.
So as long as you repay whatever you withdraw, you have continuous access to funding and don’t have to apply and wait to get approved every time you need to borrow money, like you do with a typical loan.
2. A business line of credit is flexible
A BLOC is a flexible funding source. Because you can access cash, you can use your line of credit for things that you can’t charge to a credit card, such as payroll.
Also, many types of business loans place limits on how you can use the funds. An equipment loan, for example, can only be used for equipment-related expenses and not for purchasing inventory or paying other debts.
A business line of credit does not come with such limitations. Because you get cash, you can use the funds for any kind of business expense.
3. A business line of credit is affordable
With many business loans, you have to borrow an amount that is large enough to cover not just your immediate needs but the longer-term ones as well. However, because you get the full amount in one go, you also have to pay interest on the whole amount even if you’re not using some of the money yet.
With a business line of credit, however, you can withdraw only what you need right away, and therefore have to pay interest only on that amount. If business is booming and you don’t need to borrow money, you don’t need to pay interest.
In addition, a BLOC usually has competitive rates and repayment terms compared to other funding options, such as invoice financing and short-term loans. The average interest rates range from 7% to 25%, depending on factors such as your company’s revenue, credit, and time in business.
4. A business line of credit is accessible to most business owners
Banks offer BLOCs but even entrepreneurs who don’t meet the high standards of banks can get Business line of credit from online providers. Even relatively new businesses can get approved, as long as the business has a decent annual revenue.
5. A business line of credit lets you stay in control
Many entrepreneurs lose control of their companies when the business goes public. This is because many investors demand control. By getting funding via BLOC, you can take care of your financial needs while continuing to run the business your way.
6. A business line of credit can improve your credit score
Even applicants with less than ideal credit scores can get approved for a BLOC. They will likely get lower credit limits and higher interest rates, as can be expected, but the good news is that having a line of credit can help them improve their credit scores and build positive credit history, as long as they make timely payments.
With a repaired credit score, the entrepreneur will have more options in the future for financing his business.
7. A business line of credit can supplement other financing sources
A line of credit can help companies manage their short-term financing needs. It also works well with other funding products for the long term, such as an SBA term loan for expanding the business over the next several years.
By combining your BLOC with a business loan, you can ensure that your business has all the capital it needs to grow.
A business line of credit is a good funding option for businesses experiencing cash flow problems. It gives entrepreneurs access to capital that they can use flexibly, and it is accessible to many business owners, not just ones who have established businesses and superb credit history. It can even help entrepreneurs boost their credit scores so they can have more options for securing capital in the future.