5 main reasons businesses take out lines of credit
Top reasons for taking out a business line of credit
- To pay for emergencies
- To get a lower interest rate
- To make payroll
- To purchase inventory
- To improve business credit
Regardless of what your company does or how big it is, a business line of credit can be a versatile financial product to help keep you up and running. Many business lines of credit are revolving accounts, which means — much like a credit card — you can keep using the available credit up to the limit as long as the account remains open and you are making payments.
With that level of flexibility, it should come as no surprise that business lines of credit can be used to address a wide array of business needs. Here are five reasons businesses may take advantage of a business line of credit.
1. To pay for emergencies
One of the benefits of an unsecured, revolving credit line is that credit is always available when you need it (as long as you haven’t maxed out your limit). If an emergency comes up — a piece of equipment breaks and needs to be replaced, or a natural disaster hits causing business to plummet — you can tap into your available credit to pay for repairs and meet your financial obligations until the situation returns to normal.
2. To get a lower interest rate
Business lines of credit often boast lower interest rates than loans of a similar size. But be aware that, unlike a term loan, where the interest rate will remain fixed over the life of the loan, most credit lines have a variable rate, meaning the interest rate can change. If you make a late payment or go over your credit limit, the lender may increase your interest rate. When you first apply for a business line of credit, your exact interest rate will depend on a number of factors, such as your credit history, how long you’ve been in business and whether the credit line is secured by collateral.
3. To make payroll
Payroll is often one of the largest expenses for businesses. If your business is experiencing cash flow issues — perhaps the business is seasonal and cash flow suffers in the off-season — you may be looking for financing so you can pay your employees. A business line of credit may be the financing you need. With a revolving credit line, you can tap into your existing credit as soon as you know you need it.
4. To purchase inventory
It’s not unusual for seasonal businesses to require extra inventory during busy sales periods. If cash flow is tight when demand hits, businesses can be hard-pressed for the cash needed to buy enough inventory to meet demand. That’s where a business line of credit can be invaluable, allowing a business to purchase the inventory it needs so it doesn’t miss out on strong demand for its products.
5. To improve business credit
If you’re looking for a way to improve your business’s credit, opening a business line of credit is one way to do so. Paying down the balance on a line of credit helps you establish a responsible payment history. Applying for — and receiving — an increase in your credit limit can give your business’s credit score an additional boost. On the other hand, be aware that each lender will reserve the right to close a credit line at its discretion, or to reduce the credit limit.