The Dangers of a Business Line of Credit
Running out of cash is the biggest danger to your business. There are many times when all you need is a quick infusion of cash, but you might have some concerns about the dangers of a business line of credit. Learn the facts so you can make the choice that is right for your business.
Doing work for the sake of work is dangerous. You will quickly lose the passion and drive you have when you start your business. To get things interesting and exciting again, you need to have enough working capital to provide a cushion against the unexpected. A business line of credit (LOC) may be the solution you seek, but first you must clear up any misconceptions about its benefits and dangers.
The Advantages of a Business Line of Credit
Having a LOC is a valuable tool for any business. It gives you a supply of quick business funding whenever you need it. This also provides peace of mind so you can feel free to make important business decisions without borrowing from other areas of your business or fearing that you will run out of cash.
In some cases the LOC costs nothing or very little to set up. Generally, once you get a LOC in place, it will stay in place. Also, it’s more flexible than traditional small business loans.
A credit line acts like a revolving loan. Most importantly, it doesn’t have the same restrictions as other types of loans. You can use your line for any purpose, such as making payroll or hiring additional help during your busy season.
There are many companies that keep a LOC year after year but never use it. Using your line also helps your business credit score so it’s in your best interest to use it. Just keep making your payments on time and don’t exceed your limits.
A Business Line of Credit = Planning
The best business owners plan. A business owner that plans has the best chance of taking advantage of growth or weathering a storm.
For example, you can pay your bills or purchase inventory before you have the cash on hand from clients and customers. This may allow you to get better deals by buying in bulk or negotiate with your vendors because you are a good customer who pays early.
Planning also helps you to foresee what’s ahead. You must always factor in aspects such as competitors, cash flow, account receivable turns and the inevitable seasonal slowdowns get a true picture of the status of your business.
Once you know where you stand, you can make smarter decisions about the direction you want to go. You will also have a better understanding of what it will take to get there. Often, you will need the benefits of a business line of credit.
Are There Any Dangers of a Business Line of Credit?
There are very few dangers in having a LOC. Perhaps the biggest danger is not using your line correctly.
It’s important that you use your line only for business expenses. If you get in the habit of using it for personal matters, like paying off your car, this will muddy the waters between your personal and business credit. You might also get yourself deeper into debt.
Additionally, if the IRS discovers that your withdrawals are not business related, they may not approve the business tax deduction. On the other hand, if you use your line to purchase equipment, you can get a double tax write off for both the interest and the depreciation.
Getting a LOC is very inexpensive, especially if you only plan to use it as a short term business loan. While they are typically low cost to set up, you do have to consider interest rates if you are getting your line from a bank. Lenders use various criteria to determine exactly how much you will pay.
The major danger of a line of credit comes if you don’t make your minimum payments. You run the chance of the line being closed or not being renewed.
At this point, the financial institution will then convert your line to a fixed payment. This means the line would have to be paid down over a period of time if you can’t make an immediate lump sum payment. As a result, you will no longer have the same kind of easy access to your line. In addition, you might have a hard time getting a line from another lender.
Your lender could also randomly decide to reduce your limit or cancel your line altogether. This can feel like the equivalent of having someone pull the rug out from under your feet while you are standing on it.
Where is the Best Place to go for a Business Line of Credit?
Now that you know the facts, you have probably decided that a line of credit is just the answer your business has been looking for. Therefore, you need to know where and how to get one.
Unfortunately, a traditional bank will not help you obtain fast business financing. They have too many rules and criteria and most small businesses can’t qualify.
Additionally, banks expect you to have collateral to back up your line. You should also know that banks usually charge numerous fees that can really add up. They may also take several weeks to approve your application.
Thankfully, when seeking small business funding, many companies have found success with alternative lenders. One of the best places to turn is a business cash advance company, like Financing Solutions (www.financingsolutionsnow.com).
Financing Solutions provides a line of credit to small business or nonprofits that have a yearly revenue of $300,000 or larger. The line costs nothing to get in place and there is no charge when the line isn’t being used.
You can apply quickly online with our 2 minute application. We will then give you, in writing, a document stating how much you are approved for and the costs.
If you want to move forward we will ask for a few documents and you can have your line set up in 24-72 hours. Since it is so fast and easy to get, a business line of credit is something every small business should have, just in case.
Signs That Your Business is in Danger of Failing
When a business fails, there are many questions. What could they have done differently? Why didn’t they see the writing on the wall? Am I making the same mistakes?
Catching minor issues before they develop into major disasters is crucial. Sometimes, it’s the only thing separating a business from one that is floundering to one that is flourishing. With that in mind, here are a few warning signs to beware of.
Falling sales – while every business experiences seasonal highs and lows, a steady decrease is something to watch out for. You must determine whether the problem is internal or external. Then, work to fix it.
Rising debt to asset ratios – if you are constantly borrowing without ever catching up, this signals trouble ahead. You might want to consider debt consolidation to reduce borrowing costs and increase your cash flow.
Past due notices – this is a common trap that can spell doom for your business. Delaying payments to vendors and suppliers may allow you to keep money in your pocket a bit longer but it’s a dangerous cash flow strategy. It also negatively affects your credit score. Look for ways to cut costs, such as reducing staff or controlling inventory, so you have the money to pay your bills on time.
Angry customers – first of all, the customer is NOT always right. However, you do need to find ways to keep them happy. It’s much cheaper to satisfy a current customer than to constantly convert new ones. Customers who are upset will trash you both online and off. This can damage your reputation for years and make it harder to recruit additional customers. Engage with your clients and encourage them to provide continuous feedback so you can address issues right away.
Unhappy employees – when the best and brightest begin to jump ship, this is a problem you must tackle immediately. Perhaps your pay is too low, you don’t offer opportunities for growth or your competition is stealing them away. It’s vital to communicate often, offer flexibility and always make payroll on time.
Negative cash flow – running out of cash is the number one reason why many small businesses fail within five years. If you don’t have cash, you can’t pay bills or make payroll.
Getting your cash flow under control could be the key to saving your business. With instant business funding from Financing Solutions, you can move your business from being in the danger zone to becoming an indomitable force.