Line of Credit for Business: Your Liquidity Safety Net
Some small- and medium-sized business owners might be wondering why they would ever need a line of credit for their business. Cash flow is fluid, there’s always more in accounts receivable than accounts payable, revenue is strong, and they’re not having any trouble making ends meet.
While that’s a great situation to be in, things can change quickly. Unexpected expenses can happen. A key employee quits. A natural disaster disables your building or the clients simply start to dry up. Whatever situation applies to you, there comes a time in every business when there’s not enough cash to go around.
It’s for times like these that lines of credit for business were created. Allowing for a kind of liquidity safety net, business lines of credit allow businesses of all sizes to meet their repayment obligations without becoming insolvent in the event of a temporary interruption to their revenue.
Why Liquidity and Flexibility Matter
The fact that liquidity matters won’t come as a shock to any business owner. You all know that, regardless of the state of your balance sheet, you need liquid cash to sustain your business. You can have the best state-of-the-art equipment, the greatest computers, and the most skilled employees, but none of that matters if you don’t have the cash to pay the electric bill or make other essential monthly payments.
Excess liquidity provides flexibility as well. If you have a few extra thousand in cash in the bank, it doesn’t matter if Client A is two weeks late with their payment. You can still pay rent on time. You can still pay your employees what they’re owed.
In short, liquidity and flexibility are vital to the short- and long-term operations of any functioning business.
The Perfect Liquidity Guarantee – Tons of Cash
Of course, there is one near-perfect solution to the liquidity problems faced by many businesses. Tons and tons of idle cash. Unfortunately (or perhaps fortunately, for reasons we’ll explain in a moment), this is not a realistic solution for most businesses. Most business owners simply don’t have large amounts of excess cash lying around. For most people, cash is tied up in operations and capital.
And this is probably for the best. Idle cash is handy to have in an emergency but it’s a tremendous opportunity cost. Every dollar sitting in a savings account at the bank is a dollar not being put to use in new or existing capital projects or earning interest and dividends in passive investment.
Businesses that keep a significant amount of cash on hand pay a substantial price for the few benefits they get.
Lines of Credit for Business: How They Work
You’re probably already familiar with how a business line of credit operates. A lender extends an amount of credit to a borrower and sets an interest rate or a monthly fee. The borrower may borrow an amount of money up to the credit limit. He or she pays interest on the amount outstanding or pays the monthly fee, depending on the structure of the line of credit. The borrower may pay back the full amount at any time.
Lines of Credit for Business: Why They Work
It’s probably obvious from the above description why lines of credit are so attractive to businesses of all types. They’re a perfect vehicle for adding flexibility and liquidity to a business, without adding substantial amounts of risk. Here’s an example of what we mean.
Say Company A holds $10,000 in cash to meet unexpected shortfalls. They would like to put that money to good use but they don’t want to risk failing to pay a debt or making essential monthly payments. So Company A takes out a $5,000 business line of credit as opposed to a small business loan. They keep $5,000 in their savings account for emergencies but they invest the rest of the money in profitable projects.
At the end of the day, Company A still has $10,000 available to cover emergencies and unexpected expenses but they’ve been able to put an additional $5,000 to productive use. The added risk is negligible given their financial situation, so the trade-off was well worth it.
This strategy works because, ultimately, businesses can either rely on cash or credit to meet cash flow shortfalls. Relying entirely on cash is risk-free but expensive with respect to opportunity cost. Relying entirely on credit is cheap with respect to opportunity cost but risky. Most businesses are best served by relying on a combination of cash and credit to hedge both risk and cost.
Alternatives to a Line of Credit for Business: Loans
When it comes to lines of credit for business, there isn’t really a good alternative. Lines of credit are a perfect solution for the problem they address that other financing products can’t really match their efficacy.But we would be remiss if we didn’t discuss at least one common alternative to lines of credit for business: a small business loan.
A term loan is great for specific situations. Generally speaking, if you have a large, one-time expense that requires working capital and increases your annual revenue in the long run, you’re better off taking out a short term loan. The fixed-term, interest rate, and repayment plan that go along with a typical loan serve you well in the situation we’ve laid out.
The problem with a loan is that they’re not really built to add flexibility and liquidity to your cash flow situation. If anything, they do the opposite with higher interest rates, fees, and repayment terms.
The problem with loans is that they’re not really built to add flexibility and liquidity to your cash flow situation. If anything, they do the opposite.
Financing Solutions: The Perfect Place to Get a Line of Credit for Business
At Financing Solutions, we specialize in offering lines of credit to businesses that desire additional flexibility and liquidity. We understand that life throws a lot of curveballs and 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 put their working capital to good use while protecting themselves in the event of a rainy day. Combine this all with the fact the a Financing Solutions Line of Credit costs nothing to set up and nothing until used, make it great for cash back up plan.
Our 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.