One of the most significant challenges for small businesses is maintaining healthy and regular cash flow. This is because resources can be scarce when you are first starting out, and business and orders can be low during the initial stages. Getting the right funding can make or break your prospects during this crucial phase. One of the wisest choices you can make during this stage is to apply for a Revolving Credit line because there are many benefits –
- Payment terms are flexible
A revolving credit line has an open-ended repayment term so money can be borrowed, repaid, and then borrowed again as needed on and on indefinitely as long as the lender keeps the credit line open. This typically allows for the minimum required monthly payment to only be the interest due which provides a lot of flexibility if the borrower is going through a period where they need to divert payment funds elsewhere temporarily. This stands in contrast to a fixed term loan which has fixed monthly required payments of both principal and interest which ensure that the loan will be repaid in a fixed predetermined number of months.
- Flexibility in how and when the funds are used
Traditionally, when you take a loan or secure a financing agreement, you usually have to mention and agree on what the money is going to be used for. For example, a medical equipment lease will be restricted to medical supplies and machinery, or a vehicle loan will be structured around purchasing a particular type of automobile. So, if you go for a closed-end loan it will specifically be meant for purchasing equipment or making an addition to your business. However, with a revolving credit line, you have the liberty to spend the money on whatever you need as the needs arise. The items you purchase or lease will not be restricted by the terms of the credit line. This provides a lot of flexibility for you to manage the valuable funds you get and invest them in areas that you want to.
A lot of times the requirements of small businesses can change between the span of applying for a loan and actually getting the cash in your hands. A credit line will ensure that your avenues for investment remain flexible, and make sure that the changing dynamics of your growing business do not limit what you can do with your loan. The revolving credit line will allow you to spread your resources over multiple items or invest in a single purchase as the needs arise.
- Separating personal and business expense
Small business owners oftentimes end up paying for a lot of bills and invoices out of their own pockets. This is mostly because smaller companies can initially struggle to regulate a constant flow of cash, but still have to deal with regular expenses. As a business owner, you may be compelled to feed your own money into the daily costs just to keep the business up and running. Although this may seem inevitable, the complications that can arise in your accounting can pose problems for you and the company.
With a revolving credit line, you can get access to a continual supply of money for your expenses so that you do not have to secure payment from your own account, or for that matter from other loans. Since the credit line can be focused only on your business expenditures, there is no overlap of your personal and your business accounts.
- Cash on demand
A revolving credit line will provide you with the amount of money you need and will make it available when you need it. In a way, it is like a credit card for your business; there is a certain limit, and you can keep borrowing any amount at any time until that limit is reached. The advantageous thing about this is that you do not have to scramble for loans and funds when you encounter expenditures. Since there is a credit line from which you can borrow anytime, you do not need to wait until you meet unexpected costs before you apply for a loan.
Small businesses go through varying phases. There may be times when the cash-flow is good, and other times when profits are low. Your credit line will make sure that you have access to a specific amount of cash whenever your business needs it.
- Improve credit rating
Managing your expenses through a business credit line can help to give you a much better credit history. Since you are not securing huge loans that leave you in debt, your business credit also looks much better on paper. For a small business, having a healthy payment history is crucial in maintaining good credit. A credit line does not impose large fixed payments on you, so it is easier for you to keep up with instant payments as well as pending ones. This means it will be easier for you to secure other bigger loans later when your business grows, and you need more significant investments. It gives you the option of renewing a credit line after the current loan, or going for a bigger business financing solution depending on what your business may need later down the line.