Emergency Business Lines of Credit: Are They Necessary?
What is an Emergency Business Line of Credit
An emergency business line of credit is exactly what it sounds like. It is revolving credit intended for business-related emergencies. A line of credit has no debt maturity date or repayment plan, rather the borrower is free to use as much or as little of the credit line as they choose. They can pay the line off at any time or they can make small weekly payments to start paying down the line. This is much different from a business loan where the business owner would make monthly payments on the entire amount borrowed, likely at higher interest rates.
The Benefits of Emergency Business Lines of Credit
There are many benefits to having an emergency business line of credit that small business owners should consider. From improving your credit score to freeing up untold amounts of reserve cash, having an emergency business credit line opens up working capital for new opportunities and protects against the unexpected. The repayment terms are also better than those of a credit card or an emergency business loan.
Increased Cash Flow
As discussed in a previous article, holding onto cash in case of an emergency is generally a good idea but only up to a certain point. There’s a huge opportunity cost that comes with holding large amounts of cash which can result in missed chances for success and unrealized goals.
Obtaining an emergency business line of credit allows a business owner to hold onto less cash for emergency funding. This, in turn, allows them to invest that cash into other opportunities to earn more revenue.
Because the business owner can rely on a combination of credit and cash if an emergency pops up, a line of credit provides a lot of flexibility. Effectively, the business owner diversifies risk management over several financial assets rather than relying solely on cash.
Hedge Against Risk
Just as holding cash reduces the impact of emergencies, having financing options like a credit line to address an unexpected immediate expense does so as well. The added flexibility reduces the impact of unforeseen events by increasing the ability to quickly respond to them.
Peace of mind
The peace of mind that a “just-in-case” credit line provides to a business owner is difficult to quantify. For many, simply knowing that they’d be able to borrow in the event of an emergency reduces stress about unknown future events. This reduced stress can translate to a real financial return in other aspects of the business as the owner finds themself better able to deal with the everyday slings and arrows of business ownership.
Improve credit score
A business’s credit score is determined, in large part, by the amount of unutilized credit it has access to at any given moment. Unutilized credit is seen by the major credit scoring bureaus as an indicator that the owner of that credit is a trustworthy borrower because they are not nearing their credit limit.
Holding an unutilized line of credit acts as a boost to a business’s credit score and even when you are approved for a Line of Credit, that can help your credit score.
The Downsides of an Emergency Business Line of Credit
The perceived downside of emergency business lines of credit boils down to a single word: temptation. For our purposes, temptation takes two forms. First, a temptation to overuse the emergency credit line and, second, the temptation to over-rely on the credit line. However, it has been our experience that most business owners don’t overuse their credit line.
The temptation to overuse the line of credit usually involves the business owner engaging in some form of the following internal exchange:
“Hmmm. I really want that new desk but I don’t have the money. I guess I could use the emergency line of credit for some extra cash flow. But no, it’s not an emergency…unless I consider what could happen if my old desk broke! It would be a disaster. If you think about it that way, the need for a new desk is an emergency.”
Basically, business owners overestimate the occurrences that should count as true emergencies and, before they know it, they’ve reached the credit limit of their small business lines funding. When a true emergency does come along, they’re completely out of luck because they have no cash flow accessible.
The temptation to over-rely on the line of credit usually involves holding inadequate cash reserves to deal with emergencies. Small business owners would be wise to remember that, while a line of credit is a necessary component of emergency preparedness, it is only one component. Cash is still required to prevent the business from falling into debt should an emergency arise.
Luckily for the average business owner, both of these downsides are avoidable. All that is necessary for the business owner to avoid one or both of these pitfalls is to exercise a small amount of self-control when it comes to spending money. Resisting the temptation to overspend or over-rely on emergency funding eliminates both of these issues, leaving all of the benefits and none of the drawbacks.
An emergency business line of credit can seem scary at first. Some worry about their ability to responsibly handle such a powerful and flexible financial vehicle and their ability to make payments to the lender. But rest assured that the vast majority of business owners have found that the benefits far outweigh the few avoidable drawbacks.
By simply avoiding the temptation to overuse or over-rely on an emergency business line of credit, one can learn to use them responsibly and reap a wide variety of benefits from its use.
A variety of businesses and nonprofits have been seeing the benefits of our Line of Credit product for as long as we’ve been in business. Do you find yourself in need of a way to even out cash flow, make sure you make payroll, and take advantage of new opportunities – all at the same time? Do you want a cash backup plan? File out our simple no-obligation 2-minute application, Call us or send us an email at Financing Solutions. Our emergency business lines of credit is low-cost, adaptable to many circumstances, and available to a large number of business without a personal guarantee or collateral.