Running a successful business requires that management makes sure the company has sufficient cash flow for operations at all times. Good business managers know this and use budgets to control how monies are earned and spent. With that said, securing access to extra working is a solid way to make sure things keep run smoothly and without interruption.
Maintaining Access to Cash
Debt is a necessary evil for most businesses. It allows a business to keep running until the business is profitable enough to support itself. That doesn’t mean a business owner has to immediately jump into the deep end of the pool. In many cases, the best debt strategy is for the business owner to secure some type of line of credit that can be used on an as needed basis.
Types of Lines of Credit Available to Businesses
A line of credit is a loan that allows the borrower to draw down and pay back funds as they see fit as long as they do so within the terms of the line. The line of credit has a stated maximum debt level and a finite due date. Interest is only calculated on outstanding balances.
For a regular small business, there are three lines of credit that make sense. Here’s a brief discussion covering each option.
1. Unsecured Line of Credit – This type of loan does not require the business or business owner to offer up assets as collateral. The loan approval process is much quicker because asset appraisals are not needed. With this kind of loan, the bank relies heavily on the business’ track record and creditworthiness. Because of the higher risk for the bank, the interest rates are typically higher.
2. Secured Line of Credit – This type of loan requires the business or business owner to offer up assets as collateral. The value of the assets must equal a predetermined percentage of the loan, often times more than 100%. Qualifying assets might include office equipment, machinery, inventory or real estate. The borrower will get favorable terms because of the lowered risk to the bank.
3. Business Credit Card – A business credit card with a fixed credit limit offers a lot of advantages. First, the business owner get access to cash much faster that having to wait for a line of credit draw down. Payment terms are more flexible, and credit cards are usually good for multiple years while a traditional line of credit might only be good for 12 months. No collateral is required. On the downside, interest rates can run a bit high.
Before deciding on which line of credit option to choose, a savvy business owner will assess the business’ mode of operation. If collateral is available, a secured LOC might be the best option because of the lower interest costs. Otherwise, the other two options offer more flexibility.