Having a healthy cash flow is imperative to successful business operations, but sometimes there are normal fluctuations that limit the consistency of that cash flow. Businesses that deal in particular industries, such as consulting, realty and contract work can experience the ups and downs of seasonal work or be stuck for revenue while waiting for clients to settle their bills with you. 

Consistent cash flow can also be an issue for start-up companies that are still establishing a clientele and diversifying their services to stabilize revenue. Even if the company has a million-dollar idea and is making money on paper, businesses might be forced to close down if they aren’t making consistent money to support their endeavors.

Having good cash flow not only ensures that both you and your employees get paid, but that you can rent a space for your office, keep your machines and technology up and running and handle day to day expenses. It can even help you grow by allowing funds to purchase more equipment or hire more talent. 

So how can businesses stay afloat if they are experiencing dry or seasonal spells? Having a credit line can be a great way to ensure that your business is able to run smoothly. 

What is a Line of Credit?

A line of credit is a type of loan that allows businesses to borrow sums of money that will be paid back on a set schedule. Usually, banks will allow for a specific sum of money that businesses are allowed to draw from as their needs dictate and they are only charged interest on money that they take, rather than the amount offered. 

Most financial institutions that work with small businesses will provide a line of credit as a standard service.

Establishing a Line of Credit

Just like any other loan, you must apply to receive a line of credit. Sometimes, new businesses have a hard time securing a line of credit without ample proof that they will be able to pay back the loan. When applying for a line of credit, you should be prepared to:

  • Provide a primary and secondary source of repayment. This helps the bank to feel secure that they will be repaid for the loan. If you do not have sources that satisfy their stipulations, you may need to provide a source of collateral.
  • Provide standard financial documents. This establishes your accounting practices and shows that you are responsible in regards to budgeting and paying back your debt.
  • Provide pro forma. This will describe your budgeting and your plan to pay back the loan. This is especially necessary if you are a newer business. 

Having a stable flow of cash can make the difference between whether or not your business pulls through a dry spell or succumbs to the pressures of not having access to consistent funding. 

If you are responsible for your business’ accounting and are able to satisfy the demands of loan repayment while understanding the interest rates and fees involved, establishing a line of credit can be a very beneficial option for seasonal or start-up businesses.

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