How Do Businesses Use Lines of Credit?
You’ve probably heard the old business cliche that credit makes the world go round. Like many cliches, it became overused because it was true. While there might be an occasional cash operator, the vast majority of the stable businesses out there rely on credit in many forms to manage cash flow, finance expansions, and more. Of course, lines of credit are just one type, but they are a flexible form of lending that you can use for a lot of different purposes, and that’s why so many companies prioritize access to credit lines when building their financial strategies.
Since lines of credit can be drawn on whenever needed, up to the maximum balance for the line, they can be used in a lot of the same ways you use business credit cards. Petty cash management, purchasing, and vendor payouts are all standard uses for them, but they go further than your cards can go because credit lines don’t require the plastic to work. Instead, you can draw cash from them, usually through an electronic transfer between your credit account and a checking or savings account. Sometimes, credit lines will even provide you with a checkbook you can use like regular checks, except they will charge a balance to your line instead of running down your bank account. The options depend a lot on the lender.
This flexibility allows companies with lines of credit a unique cash flow management opportunity because the lines are reusable whenever they are paid down. As a result, they can be used as the primary payment for many day-to-day expenses, then paid down when large payments come in to satisfy customer invoices. For businesses that operate on a cash basis instead of invoicing, they can be a bridge to purchase inventory in advance of a big event where you predict demand will spike. That means being able to load up a storefront without risking your cash reserves, and that can help your business reach the next level.
When you have a credit line established, it is easy to get that account limit raised as your business grows, too. Since you’re an established customer, being in good standing with regard to payments and verifying your income is usually enough to raise the limits when you grow. That can take the pressure off your need for some other business loans and credit types. At the very least it means being able to hold on to a proportional buffer for your cash flow as your needs grow. There are more uses for lines of credit, but many of them are industry-specific, so keep digging to learn more about how your industry puts this financial tool to use.