Business Line of Credit: When to Start Planning for One
Many businesses without lines of credit don’t think about obtaining one until it’s almost or already too late. They wait until they’re short on payday, their creditors are calling, or they’re unable to meet their obligations due to not enough revenue or a lack of cash flow.
So how does having a business line of credit avoid getting into this situation? The keyword when it comes to planning for a credit line is “prepare.” Be ready before you get into trouble, before you have cash flow and funding problems, and before you run into a shortfall. All of these are great times to consider getting a business line of credit. Because, when the time comes, you might not be able to arrange a credit line to get you out of a jam and cover necessary business expenses.
Before You Need It
As we indicated, the best time to consider getting a business line of credit is before you need it. In fact, the perfect time to get one is when your bank account is flush with money and your business is running beautifully. That’s because a business line of credit is a fall-back. It is a backup plan. But a backup plan doesn’t do you much good if it’s not in place when the you-know-what hits the fan.
If your financials are in great shape – you have an excellent FICO credit score, a great credit history, good cash flow, and no problem making monthly payments – don’t make the mistake of telling yourself you don’t need a business line of credit. A business line of credit is a safety net. It’s like an emergency savings account in personal finance. If you’re not one of the lucky few to have the luxury of large cash reserves, it’s an absolutely essential contingency to have when unexpected expenses come up.
A Narrow Margin of Error
The JP Morgan Chase Institute published a study of the financials of small businesses in 2016. What they found was that most small businesses were operating on exceedingly small cash reserves. Depending on the industry, most small businesses had only enough cash to cover six or fewer weeks of expenses. Here’s a breakdown of their findings by industry:
- Restaurants: 16 days
- Repair and maintenance: 18 days
- Retail: 19 days
- Construction: 20 days
- Personal services: 21 days
- Wholesalers: 23 days
- Metal and machinery: 28 days
- Health care services: 30 days
- High-tech manufacturing: 32 days
- Other professional services: 33 days
- High-tech services: 33 days
- Real estate: 47 days
The lack of a significant buffer for most small businesses makes access to fast credit or some form of cash advance even more crucial. If the difference between insolvency and financial health for a business owner is measured in days, it is important to have a backup plan in place in case there is a temporary interruption to income and revenue. Most credit card companies, credit unions, online lenders, and traditional banks won’t accept an unforeseen event as a legitimate excuse for missing monthly payments.
Before an Emergency
The nature of a business emergency is that it’s all-encompassing. Whether it’s a flood in your restaurant, a key associate in your firm quitting without notice, or uncovering financial malfeasance by a hired professional, if you’re unfortunate enough to experience a business financing emergency, you’ll have your hands full for a little while.
Times like these are the worst moments to be worrying about where to find the money needed to keep your business afloat while you deal with the problem. In cases like these, having your solution ready and at hand without having to worry about a lengthy application process or contacting the bank makes all the difference in the world.
If you wait until the last second, you may not have time to fully investigate the terms of any credit card, line of credit, or loan you secure. You may not have time to investigate the best lenders or distinguish reputable from disreputable companies.
So before you suffer misfortune, build some slack into your finances by securing a business line of credit. While you won’t need it in the best of times, you’ll be glad it’s there in the worst of times.
Before You Create a Huge Cash Reserve
One of the great things about a business line of credit (as we’ve written about before) is that the increase in flexibility allows you to reduce the amount of cash you keep in reserve. Reserve cash reduces risk but at a significant opportunity cost. Cash locked up in a savings account doesn’t earn significant interest nor can this lump sum be put to productive use in the form of capital projects.
Before you create a large cash reserve to protect against emergencies or unforeseen events, consider taking a look at your business line of credit options. You just might save yourself a significant amount of money.
Before Any Major Changes
Let’s say that you’ve severed your relationship with one of your biggest clients because of consistently late payments and begun engagement with a new client. While it’s definitely a cause for excitement, be prepared for a rainy day in case the new arrangement doesn’t work out.
This principle holds true for any major change in your firm’s book of business or structure. While you’re always hoping for the best, the changes to your annual revenue or working capital may create a temporary interruption in your ability to meet your expenses. In the worst case, you could be unable to make payroll, pay fees, or a government remittance.
Before you undertake a major change, plan to build in a little bit of cushion by securing a business line of credit first. That way, you’ve got a safety net in case things don’t go according to plan.
Financing Solutions: Your Backup Plan in a Tight Spot
At Financing Solutions, we specialize in offering lines of credit to businesses that don’t need one…yet. We understand that life throws a lot of curveballs and, for that reason, you want to be prepared in case something unforeseen happens. Our low-cost business lines of credit are perfect for small and medium-sized businesses that want to enjoy the best of times while preparing for the worst.
Our online credit line application allows you to access a quote in just a few minutes or give us a call at 862.207.4118 and let us know what you’re looking for. We’d love to chat with you.