When you run a business, various forms of debt become necessary tools to keep everything moving properly. For example, debt may be necessary when new supplies or materials need to be purchased but the revenues from previous sales may not have finished arriving, or when unexpected expenses may have occurred. One such tool is opening lines of credit with a lender. This form of debt financing has strengths that can be used for business purposes, though it still may not be the best solution for every problem.
When To Use a Credit Line
Business credit cards often have high interest rates and conventional loans need to be negotiated in advance and require knowledge of the total amount needed. So, for large unexpected or unpredictable expenses, credit lines become a useful option. Typically, these will have lower rates of interest than those charged on a credit card. While they usually have higher rates than those on negotiated loans, they also allow for greater flexibility, including the ability to pay off the balance and borrow again so long as you remain below the ceiling. This also means that credit line payments aren’t tied to a fixed schedule, so expenditures can be paid off sooner if extra funds become available.
When Not To Use a Credit Line
Conversely, there exist times when lines of credit may not be the best option. Large singular expenditures, such as upgrading production equipment or opening a new location, are better served with a conventional long-term loan, both for the lower interest rates and for the regularity of payments. At the other end of the spectrum, small day-to-day expenses such as office supplies may be handled better by using a credit card. Their small, often incidental nature means that they can be accommodated within the company budget if planned properly. Credit lines also are not a substitute for cash, so be wary of using them as a substitute for revenues when expanding production, especially if the incoming funds are not guaranteed.
The Bottom Line
Like all forms of financing, credit lines are another tool in the savvy business owner’s toolbox. While they are not a one size fits all solution, they can make for a valuable resource. They bring a powerful combination of relatively low interest, flexible spending, and the ability to pay down the balance as desired that can be instrumental in the often unpredictable world of business.