Every month I talk to several business owners who think they they need an investment or a business loan to help fund their business. I often ask if what they really need is a line of credit rather than a fixed loan or investment, and they have no idea whether a line of credit would be helpful for their business. So what signs should you look for in your business that might suggest that a line of credit would be your best option?
1. You Produce a Product or Provide a Service Before You Receive Payment –
Many business models require that you produce a product or provide a service before you receive payment for the work. This means you may need to buy materials to make the product, you will need to pay employees to provide the service or manufacture the product all before you will get paid from your customer. An example of this might be manufacturing or auto repair. We offer a comprehensive manufacturing financial projections template and auto body shop profit and loss template. For this reason, a line of credit should work well to even out your cash flow cycle and help you sleep at night.
2. You Provide Payment Terms for Your Customers –
If you allow your customers to pay you 10, 30, or even 60 days after providing your service or delivering your product, you are a good candidate for a line of credit. Again, in this situation you will likely need to borrow funds for those 10, 30, or 60 days, but you don’t need a 72 month loan, and you shouldn’t give up 10% in your company for an investment that you only need for 30 days. A line of credit allows you to pull down funds as you need them and then pay them back once you are paid so you only pay interest on what you actually use.
3. Gap Between Accounts Payable Terms and Accounts Receivable Terms –
Sometimes business owners are required to pay their suppliers much sooner than their customers pay them. For example, you might need to pay your suppliers for the components to build you product within 10 days after receiving the raw materials, but your customer may not pay you for 45 days after receiving the finished product. This means you could have a 60+ day gap where you are paying others before you get paid which can put a real strain on your cash flow. A line of credit is an excellent option here.
So if these 3 signs sound familiar it might be time to start shopping for a line of credit. One place to look is Lendio. We partner with Lendio here at ProjectionHub to help entrepreneurs find the best financing options available for their specific situation. Lendio is kind of like the match.com of business loans. They help match you with the best lenders and those lenders will compete for your business so that you get the best possible deal.
If you have any questions about whether a line of credit makes sense for you, or would like us to review your financial projections, don’t hesitate to reach out at firstname.lastname@example.org