The Irony of Using Lines of Credit for Cash Flow Problems
A line of credit is similar to a credit card in your business’s name, but it provides better financing terms and interest rates. The funds in your credit line can be used as working capital for virtually anything: payroll, inventory, taxes, advertising, business emergencies, repairs, remodeling projects, technology, and many other things. It’s common for business owners to use lines of credit to fix cash flow problems, but that’s not as easy as it sounds.
What Are Cash Flow Problems?
Poor cash flow means your business is running into a wall when trying to pay suppliers and cover monthly expenses. Even though your company has good revenue, you just don’t seem to have funds at the right time of the month. This can happen for several reasons, from slow-paying clients to lower-than-normal sales.
Seeking to correct these issues, some entrepreneurs pay overhead costs using a line of credit and then pay back the funds later on when clients make payments. Why do you need to be careful with this technique?
What Are the Requirements for Obtaining a Line of Credit?
The first problem with this approach to improving cash flow is that many lenders see it as a red flag. If you tell the bank that you’re having trouble with your cash flow, it’s saying that you don’t have a way to guarantee timely repayment.
Instead, lenders want to see that your company has sufficient working capital on hand to cover purchases quickly and smoothly. You don’t need perfect credit, but you do need the ability to manage your revenue and finances correctly.
What Are the Benefits of Using Lines of Credit for Cash Flow?
Once you get approved for business credit, nothing is stopping you from utilizing the funds to strengthen your cash flow. Doing this can have several benefits for your company, such as helping you purchase more inventory at better prices. With capital that is always available, you can protect your credit score and avoid damaging your relationship with suppliers.
What Are the Downsides of Turning to a Line of Credit for Cash Flow?
It’s alright to use a line of credit to bolster your cash flow every once in a while. This financial tool can be excellent for dealing with emergencies and helping your company grow. You shouldn’t become dependent on it, though. If your cash flow has a problem, you need to find and fix that problem instead of using financing as a bandage.