It’s common for a business to become cash strapped now and then. Rather than going through the formal process of securing a bank loan, find out when it makes sense to take out an unsecured line of credit.
As your business grows, so do its expenses. At some point, your cash flow might not be able to keep up. When this happens, your business growth might hit a bottleneck.
To overcome their cash flow problems, business owners often look for external financing. But this can worsen the problem if they don’t have all of the facts they need to make the right choice.
Out of the many financing options, an unsecured business line of credit is among the easiest and most convenient for many business owners. But that doesn’t mean it’s for everyone. These are the times when it’s logical to take out a line of credit.
1. Seasonal Cash Flow Injections
As you become more familiar with your business, you can identify cash flow or revenue patterns. For some industries, such as retail, the revenue figures will go through peaks and troughs throughout the year.
The problem arises when there’s not enough working capital to support the slumps. Not only that, but you might also need additional cash flow to prepare for the peaks. If you produce goods, you’ll need to buy more parts to support your peak order months. You may need more inventory if you’re in retail, and so on.
This is where an unsecured line of credit can be your best choice. Once approved, you get access to cash to finance your operations up to the credit limit. This is unlike a loan, where you get a lump sum which you’ll have to pay back over time.
An unsecured business line of credit is almost like a credit card account that you can charge and pay off as you wish. But in this case, the interest rate is much lower than a credit card.
2. Marketing and Advertising
A business should never stop marketing. Even when your business is well-known, there are always more potential customers in waiting. Rather than a one-time project, marketing should be a continuous effort.
Financing your marketing strategy isn’t always easy. Since it’s such an important aspect of a successful business, you may have to invest quite a bit in it. In addition, you might not see the results right away, which is why you shouldn’t spend the last of your budget when creating one.
You’re much better off funding it with an unsecured business line of credit. Save your cash on hand for the day-to-day operations of your business.
Of course, it’s always best to allocate a portion of your revenue to advertising rather than relying on external financing. But this may not always be possible. Plus, you need to spend money on marketing to make more money.
An unsecured line of credit doesn’t accrue interest if the balance is zero. You can draw some money, pay it back, and keep the line of credit around for a rainy day at no cost.
3. Human Resource Management
People will come and go as your company expands. Each time this happens, you risk disrupting your everyday operation. To fill the gap as soon and effectively as possible, you need to have a funnel.
Whenever someone new joins your company, you need to train them. Every once in a while, you need to train your current employees to make sure that they’re up-to-date with the best practices.
This means that you have to continuously invest in human resources. It’s an ongoing expense that should return more money than what you throw at it. The key is that you have access to cash to invest in recruitment and training.
For this reason, a revolving option such as an unsecured line of credit might be your best tool. You can cover recruitment, on-boarding, training, and many other expenses smoothly even when the money is tight.
This ensures a seamless flow of employees that get everything they need to ensure maximum productivity.
4. Product Line Changes
If you are branching out and adding different products or services to your business, an unsecured line of credit can be a fitting choice. This is especially true if you have a high-volume, low-dollar offer.
You never know if a new product or service will work out. As your business grows, you might have to diversify your offering. For this reason, one-time financing options, such as a loan, don’t work here.
You need to make sure that you’ll be able to make up for a potential loss and direct your money elsewhere. Balancing out your offer to ensure a steady revenue stream can be quite tough if you’re only working with what you have. The risk of cash flow disruption is too high.
By taking out an unsecured business line of credit, you know that you have some money to fall back on if your new product or service doesn’t turn out as expected. This can cushion the blow and keep the business going as usual.
Is an Unsecured Line of Credit for You?
An unsecured business line of credit comes with numerous benefits. This isn’t to say that it’s a one-size-fits-all solution. Before you decide to apply, you might want to make sure that it will meet your financial needs and business goals. If you do end up applying and getting approved, you won’t have to pay interest if you don’t use it.
The above outlines only some of the most common uses for a business line of credit. It’s a flexible financing option that can give you more control over your cash flow. You can use it for whenever your business has a temporary cash shortfall.
Visit our website to see how a line of credit can support your business.