A business line of credit is a revolving loan that you can use to fund a range of business expenses. With a line of credit, you can use the funds when your operating capital is low, repay the line when you receive additional revenue and then re-spend the funds as needed. Small businesses use these financial products for a range of expenses.
7 Ways You Can Use a Business Line of Credit
Restock for the Busy Season
If you are in an industry where the season has a heavy influence on your revenue flows, restocking inventory before the busy season can be difficult, especially as the busy season typically comes right after the slow season when operating capital tends to be tight. In these cases, whether you are selling patio furniture, ski boots, ice cream or any other seasonal product, you may use a line of credit to help you restock.
As lines of credit stay open until closed by the lender or borrower, you can use the same line of credit to restock your shelves before every busy season and then pay it back when your revenues go up.
Cover Fluctuations in Working Capital Due to Slow Repayment of Accounts Receivables
In other cases, rather than facing seasonal ebbs in cash flow, businesses face lower cash flow because their clients take too long to pay their accounts receivables. In these cases, business lines of credit can also help. The business owner can use the line of credit to cover regular operating expenses such as payroll, utility bills, and mortgage payments. Then, when the clients finally pay their accounts receivables, the business owner can pay down the line of credit so that it’s ready to fall back on again in the future.
Business owners also use lines of credit to access the advice and training of experts in their fields. For example, if you have a sales team and you determine that they would be more successful with a new script and a new approach, you may decide to hire a sales consultant to help you draft the new script, train your sales staff and implement the program. Similarly, if you decide that new software would speed up your business processes and lower expenses, you may decide to use your business line of credit to hire a software consultant to help you choose, install and use the software.
Launch a New Marketing Campaign
Businesses who want to attract new clients, who want to recast their brand in the community or who want to increase their presence online, often use a business line of credit to launch a new marketing campaign. If you are trying to decide if a marketing campaign is a positive use of your line of credit, you should look at how much the campaign costs, who it’s going to reach and how you expect those new clients to boost your revenues.
Expand Physical Location
The ideal result of a marketing campaign is to have more customers than your business can hold, and when that happens, many business owners again turn to their line of credit. Using credit to expand your physical location gives you more space to display new inventory in your boutique, more room to seat diners at your restaurant or extra space for whatever your business does. If you are certain that the extra room is what your business needs to attract more profits, expansions to your physical location can be an ideal way to use a line of credit.
Jump on New Opportunities
In other cases, businesses use lines of credit so that they can jump on new opportunities. For example, imagine you’ve just been offered a contract with the potential to yield $50,000 in profit. You would love to take the work, but you don’t have the right tools. However, if you spend $5,000 on new tools, you will be able to jump on the opportunity.
In cases like this, it’s important to sit down, look at your expenditures and compare the amount you need to borrow (including interest and fees) to see how that compares to the potential for profit. If you profit after the expenses, then, using a loan to jump on the opportunity is a great idea. In other cases, even if you just break even, you may also want to consider taking out the loan as you will then have the tools you need to take advantage of similar opportunities.
Build Up Credit Scores
Finally, some small business owners use business lines of credit strategically to build up their credit scores. If you work with a lender who shares information about the loan with the country’s credit reporting bureaus, your credit reports will reflect the total line of credit, the amount you owe, and whether or not you’ve made timely payments. If all of this information is positive, it can help to boost your credit score.
Small business owners use their lines of credit in hundreds of different ways. Some borrowers use lines of credit to buy new hair dryers for their barbershops, others use credit to launch nationwide marketing campaigns and still, others purchase nets for fishing, new shelves for inventory displays or crab tanks for their fish restaurants. The reasons for using a line of credit are as diverse as the world of business itself. The one constant, however, is that smart borrowers use credit strategically to grow their businesses.
About the Author:
Kabbage allows businesses to use the power of their own data to get immediate access to the working capital they need to grow. We do it all online within minutes with no forms and no waiting. You can get a line of credit up to $100,000 that’s accessible at any time.
Category: Financial Management