Line of Credit: Is It Really a Cost-Effective Option for Your Small Business?

The cyclical nature of running a business sometimes requires borrowing money to meet a business’ short-term needs or goals. Whether you need funds to launch your startup or to expand your established small business, every business owner will experience their share of financial ups and downs. The key to running your business effectively is to find a way to manage that risk and secure some financial stability.

Many business owners turn to a business line of credit (LOC) to try and secure their financing. An arrangement is made between the financial institution (usually a bank) and the customer that establishes a maximum loan balance. The borrower is then permitted to withdraw funds on the line of credit at any time. As long as the maximum limit is not exceeded, this business line of credit can be reused and repaid as often as the borrower chooses; the borrower only pays interest on the portion borrowed.

The question is: is a line of credit really your small business’ best, most cost-effective option? While typically used to resolve short-term working capital needs, is a line of credit financially beneficial to your business in the long run?

Why Small Business Owners Choose a Line of Credit

Not only do 47 percent of small businesses have a line of credit, but 28 percent are relying on borrowed funds on a regular basis. While there are many reasons businesses seek credit, the most frequently cited purpose (63%) is cash-flow. Having a line of credit provides a small business with the flexibility it needs to cover day-to-day operating expenses and accomplish business goals when seasonal business is slow. The business has cash on hand for when it needs it most, and can then pay it off when payments are received or when collections are made. Other typical reasons small business owners choose a line of credit are to create a safety net for unexpected costs and to take advantage of unique purchasing opportunities.

The Real Cost and Risk of a Business Line of Credit

Many business owners assume the cheaper rate a line of credit involves makes it the ideal choice for their working capital needs. However, while a line of credit does involve cheaper interest rates than other forms of financing, the real issue is whether your business is receiving the number of funds it really needs when it needs it most. For example, if your business is granted a $200,000 line of credit but really needs $600,000, the rate involved is really a moot point. Although the rate may seem reasonable, if the facility limit given does not match your business’ needs, you will still lack the necessary capital to fund growth and seize opportunities.

In addition to accessibility and cost, it is also important to consider the long-term effects of a line of credit. When money is tight for your small business, the cash cushion a line of credit creates may appear to breathe financial life back into your business. However, the fact remains that a line of credit is a debt that must be repaid – a “solution” that has the potential to cost millions more in the long run. The risk in obtaining a line of credit is that you could ultimately find you have spent the entire amount you have access to and are left unable to repay it because your business is experiencing a slow period. Depending on the structure of your business (e.g. sole proprietor), this debt might even become a personal liability.

Protect Your Business’ Long-term Financial Health with Invoice Factoring

Believe it or not, there are funding solutions out there that offer your business cash quickly, and allow you to avoid unnecessary debt and risks. This is just one of the many reasons why business owners are turning to invoice factoring companies for their working capital needs. In addition to providing capital for present and immediate cash needs, factoring also helps generate cash to support growth, cover payroll, increase inventory, purchase needed materials/equipment, fund expansion and improve overall cash-flow.

Invoice factoring (also known as receivables financing and invoice financing) involves the factoring company purchasing your business’ invoices, and then quickly advancing the working capital your business needs against its unpaid accounts receivable. Because your small business is provided with cash it has already earned, your business can seize opportunities and obtain healthy growth, without diluting its equity or incurring debt. When you also consider the easy, straightforward application and setup process, it is not surprising that invoice factoring continues to be an attractive cash solution for many different businesses, in many different industries.

Security Business Capital Helps You Succeed Without a Line of Credit

If your startup or small business is seeking alternative financing solutions to meet expenses or fund expansion, consider what Security Business Capital’s invoice factoring services can offer your business. Oil and gas services, temp staffing, manufacturing/distribution, and transportation are just a few of the business types that can use SBC’s invoice factoring services to generate cash on hand.

If you’d like to learn more about Security Business Capital’s invoice factoring option or other services, like PO financing, contact SBC for a free quote and/or consultation.