How to use a line of credit to your advantage.
Many companies have a line of credit. The most successful know how to use it to make their business grow.
A line of credit is a flexible type of credit that provides access to a specific amount of money you can draw from and repay (with interest) again and again as needs arise. Lines of credit are often used to finance short-term operating expenses. That contrasts with a term loan, which is typically the financing method of choice for real estate, equipment and other major fixed assets that take years to repay.
Smart businesses put their lines of credit work for them in strategic ways like these:
To provide capital for expansion.
Expanding into new markets and winning new customers takes time. Even then, businesses may need to provide their goods and services to customers on credit. That may mean waiting 60 to 90 days — or longer before cash starts flowing in. A successful expansion, in other words, can starve a fast-growing company of cash. A line of credit can provide the operating capital needed to cover payroll and provide the operating capital needed to carry a company through periods of expansion.
To capitalize on business opportunities.
When opportunity knocks, a business must often answer quickly. Secured by assets your business owns, a line of credit makes it possible to purchase the inventory of a competitor going out of business, develop a new product idea or capitalize on other unexpected opportunities that land on your doorstep.
To attract customers and increase sales.
Channeled into an effective marketing or promotional campaign, funds from a line of credit can help increase exposure to your products and services and drive sales growth. The extra revenue generated by the campaign can then be used to repay the funds drawn from the line of credit, so they are available to fund the next campaign.
To finance a seasonal business.
A line of credit can be a great way to fund a business that experiences significant fluctuations in revenue during the year. It provides the money you may need to cover expenses during seasonal lulls, which you pay back when business picks up. Unlike a term loan, where the payment amount remains consistent year-round, a line of credit’s repayment is more flexible. As long as minimums are met, you can adjust your repayment to reflect your current cash flow.
To add staff.
The salaries of new R&D, business development and other personnel are a significant overhead expense that can yield high returns. A line of credit gives you the ability to hire top candidates who can give your company a long-term competitive advantage, help you gain access to more sales and earn the profits you need to replenish your line of credit.
To build credit.
Newer companies often have fewer assets than their more-established counterparts and, therefore, have access to less credit. Because a line of credit gives you control over the amount you borrow at a time and allows you to display your ability to repay it over and over, it can be a good way to demonstrate your creditworthiness. Lenders tend to look upon borrowers more favorably when they can see a strong repayment history. A line of credit, in other words, can be a tool you can utilize to finance future plans.
The bottom line:
Once approved, there is no one “right way” to use a line of credit. Businesses that are strategic about when and how they tap into these funds, however, can often successfully leverage them to fuel their company’s growth.