What About a Line of Credit?
From discussions with many entrepreneurs and big business owners, I can tell you the horrors of having clients, accounts and wish-lists, but without the requisite or immediate returns coming in. Clients pay late, accounts are closed and almost every week a need for the business pops up that must be met urgently. Cash flow is sometimes tight, but still the piper comes knocking each month with more and more bills, it seems. So, is a line of credit good for business? What exactly is it?
Simply put, it is a service offered by most financial institutions which allows the borrowing of funds against a set limit. For example, I have a line of credit with my credit union, in case of a rainy day. Of course, if you do use your line of credit, there are associated fees which you must pay back, along with the credit you have taken. A brief comparison shows that the fees are nowhere near the eye-gouging rates imposed by credit card companies, so take a breath! A line of credit is meant for business purposes only. So, if you see a pair of shoes and absolutely have to
have it, this is not for that. Commercial lines of credit usually have guidelines and restrictions on how they may and may not be used. Note them carefully before agreeing to a line of credit. Of course, there are also requirements before you are actually approved for a line of credit, so most likely you’d be asked to show assets, cash flow and proof of a good credit score.
After you get the line of credit approval, it’s not an excuse to be happy and carefree, as banks and credit unions sometimes want to ensure that your business is healthy enough to actually keep their service. This means that you must pay the full line of credit every so often, to show that your business is not solely dependent on the line of credit. There may also be ratio compliance, which you may need to discuss with your financial advisor before opting for that service. If you have cash flow problems from time to time, a line of credit may be for you. As mentioned, it is
cheaper than some other forms of credit, for sure. It also helps protect your reputation. Do you want to be branded as the guy who never pays his staff on time? Or the lady who always asks for two or three extra weeks to pay her bills?
Obviously, this service is not the only way to get additional money to aid your business. There is the traditional loan, if your business is in need of a large sum of money all at once; there is asset based lending and even invoice-factoring. Weigh the pros and cons before embarking upon any option which will cause indebtedness.
Lots of love & good vibes, Veoma Ali
Veoma Ali is an Advertising Executive, with a Ph.D in Communications and a Masters in Business Administration.