The Advantages of Business Lines of Credit

It’s astounding to realize that more than four-fifths of all small business failures stem from cash flow problems, but recent studies have shown it to be so. That also means a lot of entrepreneurs could have averted their misfortune with the right plan for bolstering that cash flow during downturns. If you’re in the process of getting your operation up and running, you should learn from the mistakes others have already made by investing your time and focus in devising a plan for cash flow management that includes prioritization, understanding the burn time present in your current cash reserves, and also lining up cash flow extension products like lines of credit and other forms of short-term debt.

There’s no one right way to get financing when you need working capital, but credit lines generally help in every industry. That’s because they are flexible and reusable. After your line is approved, you don’t need to reapply when you need a cash advance, you can just draw on the open balance, up to the maximum. Since credit is unsecured debt, this gives you an opportunity to get the cash you need without putting up collateral, making it easy to meet your obligations even when you have a slight slowdown in your incoming payments. This can be the difference between a vicious circle and a chance to break out into a cycle of growth once more.

Lines of credit also provide you with a way to extend cash flow without cost in many circumstances, because many of them come with grace periods between the withdrawal of funds and the assessment of interest for the first time. If your company knows money is coming within that grace period, the use of credit lines can wind up averting interest costs entirely. Of course, it can be hard to predict whether you will pay back before that first interest assessment with total accuracy, but its existence still buys you time before the first charge, and that is often enough to lower the overall cost of the debt into the range where it’s the least expensive option for accessing short-term cash.

Overall, the increased control over your capital provided by lines of credit can’t be underestimated, but it’s also important to understand when you might want to dig into another form of financing. Credit lines are useful enough every company should have one, but if you are consistently using them to manage your finances because of a clear issue like late payment from customers, they aren’t able to flex as much as you need them to when unforeseen expenses crop up. That’s why your cash flow management toolbox needs a variety of tools in it.

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