During the early stages of startup companies, entrepreneurs tend to face major problems with maintaining regular cash flow. Insufficient funds can greatly hinder further development.
The occasional gaps they may face, between receivables and expenses, should be handled with caution. For instance, an entrepreneur may prepay on expensive merchandise, when the money will only be able to be generated after a period of two weeks. In this instance, the cash flow gap experienced between periods can significantly affect the daily operations of the business.
These gaps are what may cause a business to collapse. However, the good news is that a line of credit (LOC) can help out in solving major cash flow issues. An LOC is a standard amount of money provided by most banks. If you don’t find them in time, your business could suffer. This is exactly why alternatives like InvoiceFinancingAustralia.com are more popular today than ever before.
The money will come in the form of a loan. The loan’s content will hinge on the efficacy the entrepreneur has to pay it off. Most of the time, banks extend secure credit which means that you will need collateral.
However, if a business is stable enough, the bank can extend unsecured credit. This can only happen though if there are multiple options for repaying the loan, and consistent payments are made.
On a regular basis, banks will extend lines of credit, specified for limited amounts of money. This money will mostly be able to be paid off within a year. The only interest you pay is extended on outstanding principal.
Unfortunately, banks do not like to approve LOCs to manage cash flow. Instead, the LOC allows one to re-borrow and repay during the stipulated timeline. Failure to repay on time can cause major issues.
An LOC can really help an entrepreneur get out of rough waters and open opportunities that would be missed if there were no cash flow.
Pros of an LOC
- Accessibility to funds whenever needed
- Interest only paid on primary principal
- Available to entrepreneurs who have bad business credit
- Effective for building said credit
Cons
- Paperwork can be overwhelming since you might need to submit it every time you reborrow
- Your credit score determines how much is to be paid back
- Certain banks or lenders require collateral
Requirements for Opening an LOC
As said earlier, entrepreneurs with bad credit can acquire an LOC. However, more important to take note of, is that traditional money lenders such as banks require a business to have a strong business revenue.
Some documentation that is needed:
- Business and personal bank returns
- Bank account information
- Profit and loss business statement
- Balance sheet
- Business financial information
Sure, invoice financing can seem difficult at first, but if you play by the rules, you have nothing to worry about. You will get the money you need to ensure a smooth business workflow.
The Top Ways to Help You Get Better with Your Line of Credit
Before taking out an LOC, it is best to understand how effective they are. Here are a few ways one should manage their line of credit.
1. Open an LOC Account Before the Need Arises
Businesses can be very unpredictable. Therefore an entrepreneur will never know when exactly that extra cash flow will be effective.
It can be a very smart decision to open an account, even before it is required. You can withdraw funds whenever you encounter problems, or whenever there is a profitable business opportunity.
2. Limit How Often the Account Is Accessed
An LOC should be limited only to a short-term financial emergency. This will help build your credit score so that you are able to borrow more.
If you are making a large purchase, then another source of funding will work best. The right use of the LOC will definitely be cost-effective, and most importantly, manageable.
3. Repay the LOC as Quickly as Possible
An LOC usually has a time frame of one year to be repaid. This is because it is not intended to be a huge balance. It is best to take out an LOC when facing short-term emergencies.
4. Avoid Using the LOC for Operational Costs
An LOC should only be used for occasional purposes. If it is used for the daily operations of a business, the credit score will likely decrease.
An LOC should only be put into consideration when there are rough patches experienced in the business. For instance, you can use it to pay off a purchase that can earn income in a couple of days. In this way, it will not be difficult for you to pay it off.
