Running a business is expensive.
Beyond the large costs you need to cover every month or every few weeks — your office space and employee payroll, for example — there are always small things that need to be taken care of daily. As a business owner, you know how important your cash flow is to keep things running smoothly.
But cash flow challenges are pretty much inevitable; all businesses have ups and downs, and even if your revenue remains high, there might come a point when you have little access to cash. So, what do you do?
When you need a short-term funding solution, having a revolving line of credit on the back burner can help immensely. Let’s take a deeper look at why every business owner needs access to a revolving line of credit.
What Is a Revolving Line of Credit?
A revolving line of credit is simply a pool of funds that you have approved access to. After qualifying for a credit line through a bank or other institution, you can borrow from this amount whenever the need arises.
When you repay the funds you’ve borrowed from your line of credit, you’ll pay interest on only that amount borrowed. And, once you repay those funds, your credit available goes back to the original amount.
Unlike other business funding, a revolving line of credit doesn’t come with a set repayment plan, because the amount you end up borrowing is up to you. Plus, you can continue borrowing and repaying funds over and over as your needs demand.
Here are some of the biggest benefits of having a revolving line of credit:
- Flexible Repayment Terms: Unlike a term loan, there is no set amount you need to pay each month if you’ve borrowed from your revolving line of credit. If you have a slow month, you have the option to simply pay the minimum amount due. (Of course, keep in mind that the amount you borrow will continue accruing interest until you’ve repaid all of it.)
- Flexible Usage: Additionally, you are not approved for a revolving line of credit for one explicit purpose—you can use the cash you borrow for whatever business expense you need covered. Many other types of business funding, on the other hand, lend you money for only one pre-approved purpose.
- Build Business Credit: Building credit is crucial for any new business owner because many lenders won’t approve you for a business loan unless you have a proven history of creditworthiness and a few years of experience. This may seem like a catch-22: you must make some money before you can borrow it. Borrowing and responsibly repaying money from your revolving line of credit is a great way to build your business credit history and will help you gain approval from other lenders in the future.
- Quick Access to Cash: Sometimes things happen that we just can’t prepare for. For example, maybe you received a big order from a new client, but you don’t have the inventory on hand to fill it, or enough liquid cash to purchase new inventory. A revolving line of credit is an excellent backup plan to cover the inventory you need so you can fill the order on time and secure a potential long-term client.