A business line of credit can be an ideal way for a company to handle everyday expenses without worrying about some of the drawbacks of a traditional loan. There are several reasons that loans aren’t ideal for businesses—particularly small businesses. One of the biggest of those drawbacks is the fact that it takes a very long time to get a loan approved, processed, and disbursed to your business bank account. For instance, if you go through the Small Business Administration (SBA), you will probably wait between 60 and 90 days for the loan to close.
The long wait times for loans are among the biggest reasons that entrepreneurs and small business owners will start to consider alternative financing options. Quite simply, if you need a loan to keep your business afloat, you probably can’t wait three months to get the funds. You might even need them right away if the money is for an emergency expense. If you just need money for day-to-day operating costs, a traditional loan isn’t much good for that purpose either.
Looking into Establishing a Business Line of Credit
Sometimes, you can plan for expenses, like renovations or pre-arranged equipment upgrades. Other times, you can’t, like when your facilities are damaged, when a piece of vital equipment breaks down, or when you simply don’t have the cash flow on hand to handle operating expenses. The question is, what can you do in these circumstances? Many entrepreneurs fund their startups out-of-pocket for the early stages. However, after a certain point, you don’t want to dip into your savings anymore—or might not have much savings left to utilize.
For handling regular operating expenses for your business, you might consider looking into getting a business line of credit. For many small business owners, a line of credit can be the ideal type of financing because it immediately feels so familiar. If you find the right lender and qualify for a business line of credit, you will be approved for a certain monetary limit—just as you would with a personal credit. You can use as much of that money as you need, so long as you don’t go over your monthly limit. Then, once your cash flow picks up, you pay off the debt (as well as the interest, if any has accrued).
Beyond their familiarity, business lines of credit are ideal for startups thanks to sheer unpredictability. In the early stage of your business, you might not know what to expect from your monthly expenses. There could be unforeseen purchases wedged in there, or you might just not be 100% clear on how much money it takes to run your business for a month or a year. The growth and evolution of a young business can and will complicate the calculation further.
Because of all this fogginess, it’s doubly hard to plan ahead for small business financing. The chances are that a bank wouldn’t approve your loan anyhow—your business is probably too young and not stable enough yet. Even if they would though, would you be able to tell the bank precisely how much money you need to cover your operating expenses? Probably not. Business lines of credit are great in that regard because you are approved for a certain maximum loan amount, but only the money you use counts against you. So if you get a $5,000 monthly limit and spend $3,000 on operating expenses, your total debt is only $3,000 plus interest.
In the case of a traditional bank loan, let’s say you got approval for the same amount: $5,000. Even if you still only needed $3,000 of that, you would be in debt for the full amount. Not only would it take longer to pay back that debt, but you would also pay more interest. As a result, when it comes to working capital and operating expenses, a business line of credit is preferable to a traditional loan. A business line of credit is more forgiving for if you overestimate how much money you need. Plus, if you do need to spend more than $3,000, the money is there in your credit account for you to use.
What about Approval?
The obvious question now is whether or not your business can get approved for a line of credit. After all, if your bank won’t give you a business loan, why would they give you a business line of credit?
The key is finding the right lender. Instead of going to a traditional lending institution, find a lender that is more focused on helping startups and small businesses like yours. At Blue Vine, for example, we offer a fast and flexible business line of credit. If you are looking for larger amounts of cash you could check out the invoice factoring options available to you as well. And unlike a traditional merchant cash advance or cash flow loan that is one-time, our Flex Credit is “revolving credit.” Get the security of a true revolving line of credit. Whatever suits your business needs. Draw whenever you want, pay only for what you use.