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Small Business Tips

Does Your Small Business Really Need A Credit Line?

As a small business looking to grow, you have a lot of finance options.

A credit line is something that a lot of business owners will consider, but how does it compare to the rest?

What are the advantages and disadvantages of a credit line? And do you actually need it?

TL; DR

A small business credit line works like a credit card to make finance available as you need it. It’s affordable, flexible and often easier to get than other forms of borrowing. However, invoice financing takes these advantages even further and offers small businesses even more benefits.

Importance of financing for the smooth operation of a business

A lot of small businesses use finance to help them grow. Growth requires investment, whether it’s in hiring people, purchasing equipment, marketing or developing products.

The balance is being able to cover all your regular outgoings while you invest in your growth. It’s no use buying a fancy new piece of technology if it means you can’t pay your rent.

Read more: Small business financing tips

This is the big benefit of small business financing. It allows business owners to cover the cost of growing, while not impacting cash flow from regular activities.

Business financing options

When you start out looking at getting finance for your business, there are a lot of options. Each has their own criteria, so you may not qualify for them all, but each is regularly used by small business owners to good effect.

  • A term loan is a lump sum from a bank that’s repaid over a period of time.
  • A small business line of credit works similarly to a credit card, and makes funds available when you need them.
  • Friends and family can lend money or invest in the business and become a shareholder.
  • Invoice financing replicates the effect of customers paying invoices immediately, which improves cash flow without getting into long term debt.
  • Equity crowdfunding enables anyone from the public to invest.
  • Angel investors are individuals who put up their own money, often for a share of the ownership.
  • Venture capital groups are professional investors who can have access to large amounts of finance.

Your goals in seeking finance will play a big role in determining which option is best for you. Finance needs can vary greatly, from needing a small amount of cash to cover bills to seeking a large investment to help the business grow.

Read more: The ultimate guide to improving business cash flow

Understanding line of credit with an example

As we’ve mentioned, a small business credit line works the same way a credit card does. A bank agrees to make a certain amount of money available, and you can use it as you need.

You’ll only pay interest on the amount of money you withdraw. The credit may expire after a period of time, or it may be revolving. A revolving credit line allows businesses to reuse funds after they’ve repaid them, without having to reapply.

This is often considered the easiest business credit line because the money is always available and you don’t have to complete extra paperwork to get it.

For example, a bank might give you a line of credit of $60,000. You use it to purchase $30,000 of inventory in the first month, so you pay interest on that $30,000.

You still have $30,000 available if you need it, or you can pay back some of the balance. Interest is charged on the amount that’s owing at the end of each month.

If it’s a revolving credit line, you can repay some or all of what you’ve borrowed, and still have the remaining balance (up to $60,000) available if you need it.

Benefits of line of credit for a business

A business line of credit for small business is often a better option than other lending alternatives. There are a few specific advantages it offers:

Control. Choose how much you borrow, when. It allows business owners to control their level of debt based on how much you need to spend at a given time.

Flexibility. A term loan locks you into set repayments at regular periods. On the other hand, a credit line can be used as you need it, which brings flexibility in how much you need to repay each month.

Affordability. Rather than take out a loan and pay interest on the whole amount (even if you don’t need it all), with a credit line you’ll only pay interest on the amount you’ve used.

Approval. The credit requirements for a business line of credit are often much easier to satisfy than with a term loan. This makes them more accessible for small businesses.

Does your small business really need a credit line?

Because a business credit line doesn’t charge interest when you don’t need it, it’s a great option for small businesses that have fluctuating credit requirements.

It makes money available at short notice, and is essentially a cash flow safety net if you have bills due or an investment to make.

A credit line can also be used alongside other forms of business finance to lower the cost of borrowing. For example, rather than taking out a large unsecured loan at a higher interest rate, you can take out a credit line at a lower rate and reduce the amount of the loan you need.

The trap to be aware of is it makes it easy to spend money just because it’s available. You should also make sure you understand any establishment fees or monthly service charges that occur on top of the baseline interest rate. Any form of borrowing costs money, and just because it’s easy to get, it doesn’t always mean it’s a good idea to use it.

Using invoice financing as a business finance alternative

Invoice financing, or factoring, is another excellent small business finance option that shares some of the benefits of a credit line.

It works by using a specialist invoice finance service to borrow the value of your outstanding invoices. Businesses often wait weeks for customers to pay invoices, and invoice financing allows you to cover bills and make investment in that time without having to dip into your own bank account.

Invoice financing with FundTap is similar to a line of credit in that it’s available when you need it, and doesn’t cost you when you don’t. However the benefits of factoring go beyond just that.

FundTap doesn’t have the account, setup and admin fees that a credit line does. While you may not pay interest on unused credit, you’ll still pay regular fees for having it available. FundTap only charges for borrowing – nothing else.

FundTap is also much easier to set up. It takes five minutes, doesn’t require any paperwork, and you can be approved for credit the same day. Small business owners often need credit at short notice, which is where FundTap has considerable benefits.

Invoice financing can make things easy too. It links to your online invoicing software, so submitting for finance is as simple as clicking an invoice. You can have the money in your account within hours.

Then, when customers pay their invoices, the borrowing is automatically repaid. This makes money available fast, and frees you up to concentrate on all the other things that are important to you.

Many small businesses find it hard to get finance. You may not have the established credit history, or the assets to serve as collateral. Invoice finance is even easier to get than a line of credit, because invoices are reliable security.

Like a line of credit, invoice finance is a fantastic complement to other forms of borrowing to make finance more affordable.

Take home message

Just because you can get a business credit line, it doesn’t mean you should. Yes, it has advantages over other forms of finance, but invoice finance takes many of those benefits even further.

Invoice finance is easier to get, more affordable, more flexible, more hands-free and available faster.

If you need to borrow a larger amount than you have in invoices, you can use it alongside a business credit line to get the best of both worlds and keep costs down.

Make no mistake – the advantage of invoice financing to fuel business growth is considerable. The average FundTap customer has increased turnover by 54% in the last two years, which shows how significant it can be.

Find out more about how FundTap works or check out a free demo today.

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