“You have to spend money to make money” is one of the oldest, most quoted and truest bits of business wisdom. Without a capital investment into your company, you may not be able to open your doors much less ever grow and thrive and, because of that fact, business owners have almost always relied on some type of external funding.
Historically, that has included everything from savings to venture capital to loans from family members to traditional business loans, but more and more frequently, business owners are turning to business lines of credit.
Here’s a look at why they’ve become so popular.
1. A Secure Back-Up Plan
A business line of credit is different than a mortgage, a vehicle loan or an installment loan. With a mortgage or business loan, you (the borrower) identifies exactly what you are going to spend the funds on before you even receive the money, and then you repay the loan slowly but surely through equal monthly installments. A line of credit is completely different.
When you take out a business line of credit, you don’t need to specify its purpose. If you like, you can spend the entire line of credit all at once and then repay it as if it were an installment loan. However, if you prefer, you can take out the line of credit, but leave the funds to the side. That turns the line of credit into a back-up plan, a life preserver or a rainy-day fund that’s there when you need it.
2. Cash Access
When you decide to spend your line of credit, it works exactly like cash. For example, fintech lenders allow you to transfer funds from your business line of credit into your checking account up to once a day. Once the money credits to your account, you can spend it as you wish.
You can use a line of credit to cover payroll, pay utility bills, buy more inventory, reimburse cash-on-demand suppliers or for any other business purpose. Most importantly, taking out cash doesn’t incur a higher interest rate as if often does with credit cards, and the use of the funds isn’t restricted like it can be with many small business loans.
3. Flexibility
In addition to providing business owners with access to cash, business lines of credit also feature built-in flexibility. When you apply for a line of credit, you are approved up to a certain spending limit, and you choose how close to that limit you want to go. You only pay interest or fees on the amount you use, and your payments are tailored based on how much you have spent.
4. Saving Time
With a revolving line of credit, you can spend the funds, repay them and spend them again. That means you don’t have to waste time applying for a new loan or line of credit. Rather, you can focus on running your business. However, that’s not the only way a line of credit saves you time, which can ultimately translate to money.
Fintech companies have revolutionized the lending application process. Now, instead of filling out stacks of paperwork, creating earnings projections, writing business plans and meeting with lenders, you simply have to log into an alternative lender’s website, create a profile and connect your business accounts. Leveraging information from sites as diverse as PayPal, QuickBooks, eBay, Amazon and dozens of others, fintech companies quickly analyze applications, generating approvals within seconds and funding shortly thereafter.
5. Greater Accessibility
As a result of their ability to analyze applications so quickly, fintech lenders are opening business funding to a whole new crop of business owners. Because their process doesn’t rely on conventional metrics or traditional credit scores, these lenders are helping multitudes of fledgling entrepreneurs gain access to the capital their businesses need to soar. In contrast, banks turn away anywhere from 75 to 80 percent of small business loan applicants.
6. Focusing on Success
Thanks to lines of credit from alternative lenders, you no longer have to worry about outdated credit models. As a business owner, you don’t have to sit around playing the credit game, trying to artfully balance debt with assets or strategically paying down this or that account. Instead, you can focus on driving your businesses toward success and you can be confident in the fact that your success, not your credit score, will be the most important factor in your next application for a business line of credit.
7. Separation of Business and Personal Finances
Separating your business and personal finances is critical, especially if you want your business to be well organized financially. You need to know exactly what’s coming in and what’s going out from your business, but that can be hard to track if your personal finances are muddled with your business finances.
For example, if you use a personal credit card for business purposes, you may overlook a tax write-off or forget to account for an expense in your general ledger. However, when you have a business line of credit, it’s a great step towards keeping your personal and business finances completely separate from each other.
Takeaway
Business lines of credit are incredibly important. They allow business owners to access the capital they need to get started, to stay afloat and to expand. These credit lines and the lenders behind them are changing how businesses apply for credit, which applications are approved and how credit is used.
Ultimately, lines of credit have the power to change the entire world of business beyond just the lending sphere.