Small Business Lending

Why Should You Have a Business Line of Credit?

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 employees

  • 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.

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.

 

Small Business Optimism Skyrockets: December 2016 Report (Small Business Economic Trends - NFIB)

Small Business Optimism Skyrocketed in December Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point jump in the number of owners who expect better business conditions, according to the monthly National Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.

“We haven’t seen numbers like this in a long time,” said NFIB President and CEO Juanita Duggan. “Small business is ready for a breakout, and that can only mean very good things for the U.S. economy.”

The Index reached 105.8, an increase of 7.4 points. Leading the charge was “Expect Better Business Conditions,” which shot up from a net 12 percent in November to a net 50 percent last month.

“Business owners who expect better business conditions accounted for 48 percent of the overall increase,” said NFIB Chief Economist Bill Dunkelberg. “The December results confirm the sharp increase that we reported immediately after the election.”

The other two big movers in the survey, “Sales Expectations” and “Good Time to Expand,” jumped by 20 percentage points and 12 percentage points, respectively.

“This is the second consecutive month in which small business owners reported a much brighter outlook for the economy and higher expectations for their businesses,” said Dunkelberg. “In this month’s report, we are also finding evidence that higher optimism is leading to increased business activity, such as capital investment.”

Sixty-three percent of respondents made capital outlays, an eight-point increase over November. Also, the net percent of owners reporting inventory gains increased six points.

“Business owners are feeling better about taking risks and making investments,” said Duggan. “Optimism is the main ingredient for economic expansion. We’ll be watching this trend carefully over the next few months.”

Despite sharply higher optimism, hiring activity remained flat in December. Job creation increased by 0.01 workers per firm and job openings dropped two points. According to the NFIB Jobs report, released last week, finding qualified workers remains a persistent problem for small business owners.

“The labor market is getting tighter,” said Dunkelberg. “That’s good news for workers because they can command higher compensation, but many small business owners aren’t yet confident enough to raise prices to offset the higher labor costs. Owners are still in a pinch, but the overall picture for December was very positive.”

INVENTORIES AND SALES

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months improved 1 percentage point to a net negative 7 percent. The surge in consumer optimism did not produce a noticeable improvement in sales at small businesses, perhaps because of the growth of internet sales which might detract from retail holiday business.

Seasonally adjusted, the net percent of owners expecting higher real sales volumes rose 20 points, after a 10 point rise in November, to a net 31 percent of owners, the highest reading since October 2005 with a reading of 40 percent. The reduction of “policy anxiety” is surely responsible for some of the remarkable improvements in sales expectations and rising consumer sentiment. The expectation of important cost relief from deregulation and tax reform is strong among small business owners and consumers, all of which is yet to be accomplished and has a hard political road to travel. But the data indicate that business owners are indeed very optimistic.

The net percent of owners reporting inventory gains gained 6 points to a net 3 percent (seasonally adjusted), a rather strong report, as long as those inventories are built to meet rising consumer demand and not a result of weakening sales.

The net percent of owners viewing current inventory stocks as “too low” improved 1 point to a net negative 3 percent, still more feeling stocks are too high than too low. The surge in expected sales gains should absorb some of these “excess stocks”. The net percent of owners planning to add to inventory improved was unchanged a net 4 percent, a good number reflecting expected stronger demand.

CAPITAL SPENDING

Sixty-three percent reported capital outlays, up 8 points from November and the highest reading since January 2013. Reports of expenditures tend to rise late in the year reflecting tax driven outlays (expensing), but this is a solid number even if weak compared to other expansions and is the second highest reading in the recovery. Of those making expenditures, 46 percent reported spending on new equipment (up 10 points), 23 percent acquired vehicles (down 2 points), and 17 percent improved or expanded facilities (up 2 points). Six percent acquired new buildings or land for expansion (up 1 point) and 13 percent spent money for new fixtures and furniture (unchanged). Overall, a nice pickup in spending.

The percent of owners planning capital outlays in the next 3 to 6 months jumped 5 points to 29 percent, the highest reading since December 2007, the peak of the last expansion but well below the high readings in the mid-90s of 40 percent. Seasonally adjusted, the net percent expecting better business conditions rose 38 percentage points to a net 50 percent, adding to the19 point gain in November. The seasonally adjusted net percent expecting higher real sales rose 20 points to 31 percent of all owners, after a 10 point gain in November. This optimism appears to be transitioning into strong spending plans as well as increases in actual outlays, a component of growth that was missing in the recovery.

Source: NFIB - http://www.nfib.com/surveys/small-business-economic-trends/