Could Your Business Benefit from a Line of Credit?
As a business owner, your goal in this economic climate will likely be to find the resources to best position yourself to weather any headwinds coming your way. On the financial side, that means utilizing cash flow tools, and exploring options for financing business needs and expenses.
With so many financial products out there, it’s important for you to loop in a vital member of your advising team to steer you in the right direction: your lender.
We consulted Jim Gavin, Senior vice president and commercial lender at Rockland Trust, to discuss lines of credit and why businesses may want one.
What Is A Line Of Credit?
A line of credit is a type of loan from a financial institution for a defined amount of money, where interest is charged when the funds are borrowed. A non-revolving line of credit may be used for finite projects, where there are costs that need to be paid up front (such as construction expenses) and your business will receive payment from your customer(s) at a later date.
For short-term needs, a line of credit may be of use to a business to cover the gap between when expenses are due and when revenues come in. The benefit is that unlike a standard loan, you are only charged interest monthly on what you have borrowed instead of the entire line availability.
“The best way to explain a line of credit for a business is to think of it like a credit card, where funds go in and out,” Jim said.
Like a credit card, you manage the balance outstanding. Unlike a personal credit card, which is unsecured meaning there is no collateral, a line of credit is secured by some sort of business asset. These assets are used as collateral against the line of credit, which makes them less risky than something like a credit card and therefore lenders are able to offer lower interest rates than you might find with a personal credit card. Lines of credit can be secured by:
Why Should My Business Consider A Line Of Credit?
The benefit of a line of credit is the flexibility it brings to cash flow. To illustrate how this can help, let’s use the example of a contractor.
A contractor may need to cover the cost of materials and labor, but will be paid a few weeks out. A line of credit enables the contractor to cover these costs upfront, giving them flexibility before their customer pays them. This could also be true for other service providers, like CPAs during tax season.
There is also peace of mind that you have flexibility should you need it at some point, such as when unforeseen circumstances interrupt your business. Lines of credit can also grow as your business does, increasing the level of flexibility you have in the same way that a credit card company may increase your credit limit as your income and expenses increase over time.
Opening a line of credit means that you are bringing a partner into your business. It is important to understand that this requires disclosure of financial statements each year and a commitment that the business owner will responsibly manage the line, paying the balance up and down over time.
How Do I Get A Line Of Credit For My Business?
A lender will look for a track record of income, meaning business tax returns that show income and expenses. Because lines of credit are secured, a lender will also look for collateral which can come in many forms like inventory, investment portfolios or real estate. For any financing questions, it is best to work directly with a lender.
As Jim put it, “It is better to come to us before you need the money, because a line of credit is a great option to have in your back pocket to increase your financial flexibility.”
Jim advises that businesses be ready and willing to share their story with their banking team, which should outline your historical track record and your vision for the future, particularly in these challenging times.
As a business owner, one of the best assets to have is a team of advisors you trust. Rockland Trust’s bankers and lenders have years of experience helping business owners like you. Our Learning Center offers great advice for business owners, as well as insights from your peers to inspire solutions for your business.
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