Why You NEED Lines of Credit (Even If You’re Not Using Them Now)

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Why You NEED Lines of Credit (Even If You’re Not Using Them Now)

Cash is one of the most difficult elements for any business to manage.

Every business owner knows the importance of having cash on hand. At the same time, every business owner understands that the amount of cash coming in doesn’t always match the amount of cash going out. After all, cash flow isn’t linear; there are ebbs and flows. This is especially true for startups and seasonal businesses.

Are you fully prepared for a cash shortage? Your business might be in a good financial position today, but that doesn’t mean you’re always going to be immune to money problems.

This is why it’s so important for your business to set up credit lines—not just when you need them but well in advance.

First, What Is a Line of Credit?

Like many financial products, a line of credit is a tool that allows an individual or business to borrow up to certain amount of money from a financial institution.

A line of credit differs from a loan in that you are not borrowing a lump sum of cash. With a loan, you receive a fixed amount of money and you are responsible for making monthly payments over a specific term. With a line of credit, you are only responsible for the money you borrow. What’s more, your line of credit stays open until you or your bank decides to close it. In theory, you can keep borrowing and repaying money for years to come!

A line of credit also differs from a traditional credit card in that it often features a higher credit limit and a lower interest rate. This is a useful tool for businesses that anticipate charging large expenses and don’t want to incur exorbitant interest fees.

Why Do You Need a Line of Credit?

A credit line can be an incredibly helpful tool for your business, as it can be used to fund virtually anything you could need during a downturn—advertising, inventory, supplies, rent, payroll, and more.

Remember, these expenses don’t go away while you’re waiting for your receivables to be paid, and depending on the cash position you find yourself in, you could find yourself needing $5,000, $10,000, or more to tide you over during a “down” period.

A credit card might not give you the credit limit you need or the interest rate you want. A personal loan might require you to take on more or less debt at a time when you don’t actually need it.

A credit line, on the other hand, could give you a credit limit of $10,000, $25,000, $50,000 or more—enough money to help keep your business afloat during virtually any downturn while you work on recovering cash. Plus, it’s a single, flexible financial product that stays open—whether you need money today, next year, or 10 years down the road.

Why Do You Need to Open Lines of Credit Now?

The catch with credit lines, as well as most other financial products, is that you need to open them as soon as possible—long before you find yourself needing them.

For one, the last thing you want is to go through the process of applying for a credit line when you’re already behind the eight ball and need money yesterday. While you may be able to get approved within a week or so, you could very well end up waiting multiple weeks for an approval. By that point, your business may have already incurred significant losses.

Second, you’ll have a better chance of being approved and getting a higher credit limit if you apply for a credit line while you’re in a rock-solid financial position. Chances are that your financial position may already be compromised at a time when you’re in need of cash.

While it’s best to set up your credit lines as soon as possible, keep in mind that you will also need to meet your bank’s requirements. In most cases, you will need to provide a business plan, have been in business for two years, show profit and loss statements, and have a strong personal or business credit score.

So, start working on your credit lines today. Planning ahead and securing your lines of credit sooner than later will help prepare you for the inevitable cash shortages that every business faces at one point or another!