A line of credit can help you better manage your small business, assuming you can manage the credit itself. When I first opened my consulting business, I avoided debt like the plague. That meant going on a strict cash basis, avoiding a credit card or a line of credit. But, over the years, I’ve loosened my standards and realized that a little credit here and there can actually help with growing a business.
As a small business owner, you may go through cycles in your cash flow. For example, marketing consultants may see lots of work from September to November and from January to May, as companies ramp up for tradeshows or holiday sales. That same business may see less revenue in December or the summer months. A gardening business may see the bulk of its revenue in summer but need to invest in supplies in the spring. By using small business credit line financing, a small business can tap into the money it needs for day-to-day expenses without exhausting existing reserves.
For example, let’s say that, with summer stretching before you, you expect to see a bit of a slow down in business. Maybe you’ll be taking more vacation time. Maybe your kids will be out of school and you want to work fewer hours. Maybe you love kiteboarding or kayaking and you spend the summers on the water. Or perhaps you simply can’t stand the heat and find your productivity goes down. You could tap into savings and even your emergency fund, if need be. But you can also take a look at a line of credit.
With a line of credit – which usually has a lower rate than a credit card – you can access cheaper credit. You can pay the full balance every month or extend the payments over a longer period of time. That way, if you’re unsure about cash flow in the coming months, you can keep more money in your bank account or emergency fund. For example, let’s say you’re in the middle of a big contract and you know you’ll be receiving $5,000 in payments next month – but, this month, your laptop, printer or business equipment needs to be replaced and it’s not a great time to be exhausting your savings account. You can use the line of credit for a month or two while you wait on your accounts receivable. (Think about credit’s role in surviving feast or famine work cycles.)
Of course, like any credit, you need to manage your line of credit responsibly. If you have trouble managing either your business or personal finances, talk to an accountant or non-commissioned financial planner.
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