It's the nature of business to be cyclical. This means your company's cash flow will find their own high and low points as well, throughout the seasons and throughout the years. Will you make it from this ebb to the next flow? Would getting a cash infusion in the form of a business loan or line of credit help you? And how can you best use this cash infusion to improve your business?
A small business line of credit (LOC) allows a borrower to draw against a lender-specified amount of financing on an as-needed basis. The advantage of a business credit line is that you only pay interest on the funds you actually draw, so you’re not stuck paying interest on capital you don’t have an immediate use for.
The traditional line of credit is typically meant for experienced business owners with proven business models. Which makes sense since the credit maximums are sizable, the rates are lower, and the requirements demand higher credit scores and annual revenue reporting. If you’re a business owner taking out a line of credit, you’ll be spending that flexible cash on seasonal business expenses, payroll and other operational costs, insurance against emergencies and for sudden opportunities. In other words, as a capital cushion. It’s there for you when you need it.
Why Should You Have a Business Line of Credit?
It's great to consistently have enough cash stored in your bank account to cover ongoing expenses. That probably means your business is doing well. But you also may want to consider the ways that having a business line of credit (LOC) can work to your advantage. Chances are, there'll be situations over the life of your business where it would make more sense to borrow, rather than completely empty your accounts.
If you were suddenly hit with an emergency, what would that do to your available cash? By spending a lot of money to fix your problem, you could end up sacrificing all that available cash—which is one of your most valuable assets. Opening a business LOC can help protect your assets by giving you a short-term boost to your cash flow.
But they're not just to help in an emergency. A business LOC can also be helpful when you have a chance to make a significant investment that can immediately improve your business. What if you come across an excellent deal on trucks that would surely expand your customer delivery base? Or if you have an opportunity to buy inventory at a steep discount? With access to a business LOC, a business could be in prime position to take advantage of these opportunities.
When to Use a Line of Credit
Certain businesses, such as retail establishments, benefit more from lines of credit because of the predictable variations in cash flow. Seasonal changes in sales mean earnings fluctuate on a set schedule, and extra money is often needed to continue operations during slow times. When you’re able to anticipate these financial needs, you can rely on a line of credit to provide security.
A line of credit is also useful when:
- You require a short-term boost in working capital
- You’re unable to meet a payroll deadline Inventory needs to be increased or replenished
- You need to cover expenses associated with hiring new employee
- Marketing efforts need to be increased in anticipation of a special event
These types of expenses may not be specific or concrete enough to allow you to qualify for a regular business loan. However, since line of credit loans are given based on financial standing rather than a specific spending plan, you can still get the funds your business requires.
Applying for a Line of Credit: The Basics
Like a business loan, a line of credit may be secured or unsecured. Secured credit lines need collateral to back them up. Unsecured lines are guaranteed by your business and require more trust on the part of the lender. In both cases, you’re at risk of loss should you be unable to make payments. The lender will either take possession of your collateral or have the choice to sue you for what you owe.
To avoid these problems, work to build up a good credit score for your business and yourself. Have a dedicated business bank account, and stay on top of all your payments. Keep detailed records of cash flow, profit and loss, accounts payable and receivable, revenue streams, assets, and income. Most lenders will want to see this information when deciding whether or not to extend a line of credit to your business.
While it’s ideal to have savings to help your business weather storms, the next best thing is to apply for a line of credit. Business credit lines were designed to help you meet short-term cash needs, such as purchasing supplies or additional inventory or covering operating expenses. Essentially, a business line of credit can help small businesses thrive and grow. A business line of credit is a good option to offset fluctuations in working capital when your expenses stay constant. A line of credit will give you access to funds to continue to pay bills on time or purchase additional inventory if needed. The advantage of a line of credit over a regular business loan is that interest is only charged on the funds you actually use. Additionally, your business can draw on the line of credit at any time that you need.
What is small business invoice financing?
Although you may never have heard of this type of small business financing, it can be a valuable solution for your small business. As the name implies, invoice financing allows you to obtain an advance against the value of your business’s unpaid invoices. Here’s a closer look at how it works and what situations it’s useful for.
Where does small business invoice financing add value?
There are many situations where invoice financing can help. Invoice financing works best for small businesses that don’t get paid right away, but instead invoice their customers and wait to receive payment in 30, 60 or 90 days (or even later).
Sometimes, waiting for those customers to pay you can really put a crimp in your cash flow. After-all, if more money is flowing out than flowing in, you are setting yourself up for a cash crunch; which is why many small businesses wind up out of business. Theoretically, your business is doing well because you have lots of outstanding invoices, but in reality, you don’t have the cash on hand to handle immediate expenses such as payroll and inventory. This is where invoice financing comes in handy.
Invoice financing can be useful for very small businesses, and even freelancers from which an unpaid invoice can make the difference between paying that month’s mortgage or not. However, it’s also valuable for businesses with big clients that frequently are slow to pay, such as government agencies or corporations that may have a lot of red tape involved in the payment process.
Invoice financing works best as a short-term financing option that can provide the working capital you need to get over the hump until you get paid. Because you get your money quickly, invoice financing is an ideal solution when an unexpected cash crunch hits and you can’t wait for a traditional bank loan. It’s also a great solution when you don’t need a small business loan, just a little bit of extra cash.
CREATE A FREE ACCOUNT IN UNDER A MINUTE
It’s entirely free and takes about twenty seconds to complete. Enter your email, choose a password, select your bookkeeping app and you’re done. Continue using your bookkeeping app just as before and your outstanding invoices are automatically available for you to clear in your secured Fundbox account.
CLEAR YOUR OUTSTANDING INVOICES
Instead of waiting 30, 60 or 90 days to get paid, click any of your outstanding invoices to get the amount transferred to your bank account instantly and securely.
You no longer need to wait for your customers to pay you to get the funds you need. We will purchase your outstanding invoices and will immediately transfer the full amount of each invoice to your bank account. Payments to Fundbox are made automatically on a weekly basis. Choose 12 or 24 week payment periods. Simple and secure.
YOUR MONEY WHEN YOU NEED IT
We manage the associated credit risks and make sure you don't have to wait for your customers to pay to run your business like you want to. Pay salaries, buy equipment, travel for business, and more. You're free to focus your time and energy on maintaining and growing your business, not your invoices. Peace of mind guaranteed.
Of course, some invoice financing solutions are even faster than others. When you use Fundbox to finance your invoices, for instance, you don’t even have to fill out an application, just create a free Fundbox account, which takes less than a minute to set up, and link it to your accounting app. Once you’re signed up, you can clear any unpaid invoice at any time and get the funds transferred to your business bank account right away.
Are you wondering how invoice financing differs from invoice factoring? In factoring, the factoring company pays you a percentage of each invoice’s value. You have to wait until the customer pays the invoice to get the rest of the money, minus a fee. When you use Fundbox, however, you get the entire value of the invoice right away, no waiting until the customer pays.
Invoice financing has another big advantage over invoice factoring: There is no interference in your relationship with your business’s customers. While factoring companies may contact your customers to get your invoices paid, Fundbox stays out of your customer relationships. You’re still in charge of collecting on your invoices, so there’s no confusion on the customer’s part about why a strange company is suddenly calling them.
Repaying your Fundbox advance is easy, too. You repay the money automatically in 12 weekly installments, with a clearing fee that’s automatically set for each advance. You can see pricing before you clear the invoice, so the process is completely transparent, and if you decide you want to pay early, there’s no prepayment penalty.
Cash shortfalls happen. The month you need to pay out for a ton of new inventory could be a naturally slow month for revenue; the need for major repair work could fall in the same month half of your employees worked overtime. Whether they are due to a slow season, lagging client payments or unanticipated expenses, cash shortfalls are survivable if small businesses look ahead and act early. Call (855) 998-LVRG or click below to pre-qualify.