How a Business Line of Credit Can Help Manage Cash Flow

For many business owners, the cyclical ebb and flow of sales can impact their short-term working capital needs. If you’ve owned a business for a number of years, you’re familiar with its peak sales periods and times when demand for your product or service declines. These fluctuations can be particularly pronounced for seasonal businesses such as landscapers and retailers. Your business should always have savings on hand, however, there are times when it may not be enough to meet your cash flow needs.

A line of credit can be an effective way to insulate your business from these occasional lulls. It allows you to borrow, repay, and borrow again—so the money is ready to access when you need it.

“The best time to open a business line of credit is before you need it,” says Vicki Batten, Director of Business Services at Hudson Valley Federal Credit Union. “That way you’re better prepared to take advantage of opportunities or manage challenges that arise for your business.”

Available options include a business credit card and a business line of credit, each with their own unique set of pros and cons. As a business owner, you’ll want to consider how you plan to use the proceeds, how urgent your need may be for the funds, and the health of the industry in which you operate. According to the New York State Small Business Administration, before you apply for such a line of credit, you should thoroughly assess your current financial situation. Lenders will factor in the number of years in business, current cash flow, collateral, and credit worthiness.

Line of Credit vs. Credit Card

Line of Credit

This is typically a more suitable option for an established company with substantial fluctuations in working capital. These businesses often have well-documented cash flow cycles and business collateral to use for assets. They may have more substantial cash flow expenditures, and plan to tap into the funds to:

• Cover short-term working capital expenses such as making company payroll
• Pay operating expenses while waiting to collect on accounts receivable
• Purchase inventory or supplies in bulk to take advantage of discounts

Credit Card

Frequently used to address short-term cash flow needs, a business credit card can be used for many purposes. For smaller or newer companies, it’s a great financial tool to help your business ramp up for the future. Larger businesses who have operated for several years may use the credit card in tandem with a line of credit to manage their short-and long-term cash flow needs. Some business credit cards even offer rewards each time you use it, which can be redeemed for discounts on office supplies, travel, or other incentives.

With the end of the year quickly approaching, it’s a great time to start planning for 2017. Take a fresh look at your annual business plan to identify opportunities or competitive advantages that could be gained by securing a business line of credit. Talk to your local business lender about what options are available so that your company can flourish in the future.