04/ 16/ 2008
by Marcia Passos Duffy
Many businesses—at one time or another—have cash flow problems. Cash flow issues can stem from a variety of reasons ranging from a large account falling behind in payments, to a management error in hiring more employees because of an anticipated sales increase, to a seasonal blip in sales. The fact is, even though you may be managing your cash flow smoothly now, you can't predict the circumstances in which you'll find yourself a few months from now. It's possible that someday you'll be stuck trying to pay your employees or vendors—without enough cash in the bank.
While the best thing to do is save enough money to weather these storms, the next best thing (if you don't have enough saved up at the moment) is to apply for a line of credit with a financial institution or bank. Applying while you are flush with cash puts you in the best position with lenders—after all, we all know that banks are more eager to loan you money when you don't need it, rather than when you desperately do.
Why should you apply for a business line of credit? Here are three good reasons:
- You need cash on tap. If your enterprise qualifies for a business line of credit, you can tap into the money any time you need help with monthly shortages in cash (note: These cash shortages, ideally, should be a result of a lag time in accounts receivables coming in). Having a line of credit handy is also useful when a good opportunity or inventory price presents itself, or when you need to offset anticipated seasonal dips in your sales. The extra cash can tide you over until your business is strong again. Note that a line of credit should NOT be used to bail a business out of a serious ongoing financial crisis; it should be thought of only as a safety net to tide the business over until accounts receivables come in. Lines of credit are meant to be used, paid off, then used again as necessary.
- You want to avoid hefty credit card fees. You can certainly tide your business over using corporate credit cards, but these rates are not as favorable as a business line of credit. A business line of credit works like a revolving credit card, but has no fixed payments and typically is based on an adjustable market-based interest rate. Check with your bank since each financial institution will vary in its business line of credit. However, in most cases, the business owner can pay the full balance off at any time without penalty.
- You simply want peace of mind. You don't need to anticipate cash flow issues to apply for a line of credit. Think of it as an insurance policy that never needs to be paid until you need it. You will sleep better at night knowing that if you ever come up short during the month you will always have money to make payroll or pay bills.
While these are all good reasons to apply for a line of credit from your bank, you should consider applying for lower-rate term loans if you plan to make large purchases—such as equipment or capital improvements.
