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There are many types of loan and funding options for your business, and you may already have several of them in place. You may have business credit cards, a startup loan, and investment funding. While the idea is to keep your business out of debt as much as possible, sometimes you need extra money for a variety of reasons. Maybe you’re expanding, buying new equipment, or embarking on a specific marketing campaign.
Other times, you might need shorter term funding to just meet your immediate needs, and you’ll be able to pay the money back quickly. This is often when a business line of credit might be right for you. Here are some questions to ask yourself to determine if this is the kind of funding you need.
Do You Need Short Term Funding?
Many business loans are designed to be long-term and meet long-term needs as well. However, sometimes you just need a little extra capital to get by with everyday expenses. The idea of a line of credit is to be short term lending that you can borrow as you need it to cover short term expenses.
A line of credit is similar to a credit card in that you only pay interest on what you need to borrow at the time, and only for as long as you need to borrow it. Instead of a larger long term loan you can borrow only what you need and pay it back quickly with no penalties or odd fees.
Do You Need Working Capital?
Working capital is an indicator of a business’s short term financial health and efficiency. It’s figured by looking at current assets vs. current liabilities. This is the money that is used to fund everyday business operations. Sometimes new businesses need help with working capital, and using a line of credit to cover those expenses is often the best choice for them.
A line of credit can help you by showing you can pay off any short-term liabilities quickly. This is called positive working capital and can be enhanced by a business line of credit used properly.
As there is usually a limit on your line of credit just like there is on any other revolving credit like a credit card, it keeps you from overspending and overextending yourself. Since it is based on a credit check and annual review, you are encouraged to use it responsibly.
Does Your Income Vary?
Cyclical businesses, or business that is seasonal, is often a challenge, and many use a business line of credit to help them weather slow periods yet still pay their daily operational expenses.
There may be other reasons your income varies. Many businesses are dependent on the weather, tourism, or other factors often beyond their control. It takes a few years for a new business to spot, adapt, and plan for these trends.
Either way, a business line of credit can be used to help your business pay for expenses during these times — things like payroll and inventory. This is money you will be able to quickly replay when business picks up again.
Do You Often Have Urgent Expenses?
This is another common business problem, especially when you’re just starting out. Something will happen that requires you to spend money now, whether that is marketing opportunities, equipment failure, or the need for something new to expand your business in a new direction.
While credit cards are sometimes the answer, a business line of credit is often a better idea, offering you some more flexibility for short term funding.
Do You Feel Secure?
A business line of credit comes in two varieties, secured and unsecured. An unsecured line of credit is much like a credit card or personal loan: the limit is based on your credit and income.
A secured line of credit is guaranteed by a personal or business asset like your home, equipment, or some other physical item of value. The limit can then be based on the value of that item and the lien against it.
This does come with some risk. Since the asset guarantees the loan, it’s actually held by the bank, and should you default for some reason, the bank could take it from you. However, if your business is doing well, but you need additional capital and are still building your credit, this could be a great option for you.
A business line of credit is not necessary, nor is it the best option for every business. However, asking a few simple questions can help you determine if a business line of credit is the right answer for your business.