More flexible than a loan, a business line of credit can give you a resource to keep your cash flow strong without jeopardizing your company’s future.
Even if you have steady revenue to meet your expenses, that may not mean your cash flow comes in at the rate you need to meet those costs. If your cash flow varies, a business line of credit can be a worthwhile choice.
What is a Business Line of Credit?
With a business line of credit, you can borrow up to a certain financial limit, similar to the way a credit card works.
If you draw on the line of credit, you pay interest only on the portion of funds you’ve borrowed. You can continue to draw funds until you’ve reached the limit of your approved credit. As you pay it back (and there’s no penalty for doing so quickly), you can then draw on it again when you need it.
Lines of credit are usually for smaller amounts than a business term loan, ranging from $1,000 to $250,000. You may not need to demonstrate the same level of collateral as you would to be approved for a term loan.
The account will be subject to a credit review and an annual review.
How to Use a Business Line of Credit
A line of credit is most useful for everyday business expenses and small, temporary cash needs.
It can also be used to build your credit score and help improve your financial standing for future business needs.
A line of credit can also be useful for your company’s tax burden. Equipment purchased with a line of credit may be eligible for two tax write-offs: The first as a deduction for interest expenses, and the second as a deduction for the depreciation of the equipment. Under the current bonus depreciation rules in the tax code, businesses can deduct up to 100% of the cost of qualifying new equipment.
Whether or not you use it for equipment, the interest paid on a business line of credit is considered deductible as long as the line was used for necessary company expenses.
When to Get a Business Line of Credit
It’s best to look into a line of credit before you find you need one. Apply for it while your business is growing!
Make sure you have a clear vision of what the funds might be used for in the future. To secure a line of credit, you’ll need a few years of revenue history, or at least six months to be considered. A lender may require tax returns, your company’s financial statements, and bank account information. Annual revenue of $25,000 will generally be a starting point to qualify.
What Not to Use it For
A word of warning: a line of credit shouldn’t be used to make important business payments such as payroll. If you don’t have the revenue to pay your employees, you have bigger problems on your hands.
The line is also not for long-term investments, such as hiring a new employee with a high salary or investing in a very expensive piece of equipment.
A line of credit could be a strong advantage for your company. If you’re in a position to meet the requirements and your business is growing, it could be a good time to apply for one.