How Business Lines of Credit Work
Business lines of credit don’t have to be confusing if you think of them the way you think of cash credit lines in your personal financing portfolio. Like those consumer versions, they are reusable and available on-demand, so you can always withdraw any of the remaining balance, up to your limit. As you repay, that balance becomes available again, and credit rates are typically slightly higher than for secured credit, but lower than business credit cards. That makes them ideal for cash flow management, providing you with a buffer you can use for a nominal fee, so you don’t have to dip into your company’s reserve cash every time your financial cycle has a couple of stress tests thrown into it.
You can’t control when customers pay or when they place orders, so you need money to buy raw materials and inventory, pay your people, and take care of contractors. Credit lines let you streamline that process. By planning your outgoing expenses carefully and working to qualify for a large enough account, you can even set up your finances so you pay everyone out of credit, then use incoming cash to take care of the credit balance. Lines of credit buy you some extra time in your cash management cycle, too, since most credit lines have a short grace period before interest even sets in. If customers pay quickly, you might even be able to borrow without making an interest payment.
Credit can also be a good way to load up on inventory in advance of events that could cause higher demand. For retail companies and foodservice businesses, this is often around holidays, including the summer holidays when many people travel. For manufacturing businesses, it’s often based around the gift-giving holidays, and there are a lot of individual business cycles in other industries with peak points elsewhere in the year, too. Understanding your industry and planning to free up credit in advance can let you go into your high demand period prepared to take care of all the business that comes your way.
The biggest differences between business lines of credit and the consumer version are the size of the line and the interest rate. Businesses often enjoy better rates than individuals, and they are also typically given access to larger credit lines. Of course, most companies make a lot more money than an individual does, so it makes sense when you think about it.