While it may seem best for a business to operate in cash and not take on debt, most businesses could benefit greatly by taking out some loans that are designed for business purposes. One type of loan that you should consider taking out for your business are business lines of credit. This type of loan can provide a variety of advantages to almost every type of business.
One reason why a business could benefit by taking out business lines of credit is that it provides cash flow for timing issues that come with being paid by customers. When you sell a product to a customer, you may give the customer up to 60 days to pay you back. However, at the same time your vendors may want to be paid within 30 days. If this is the case, you will have a cash flow shortfall for at least 30 days. Having access to business lines of credit will allow you to pay the vendor from your line of credit. Once you have then been paid by your customer, you can pay off the line of credit balance.
Having access to business lines of credit will also allow you to purchase inventory in advance. If your business operates on any form of seasonality, you will likely have to purchase a large amount of inventory a couple of months before your busy season. Since you will likely not have the cash on hand to pay for the inventory upfront, you could use the business lines of credit to purchase the inventory. Once the busy season is over, you can then repay the balance on the business lines of credit.
While having access to business lines of credit comes with obvious advantages to a business owner, you should expect to go through a regular examination from the bank. Whenever you want to borrower from the line of credit, the bank will want you to provide them with a list of accounts receivables that you have from customers, and a current list of your inventory. The amount of money that you can borrower at once will normally be limited to a certain percentage of your A/R and inventory balances. Furthermore, at least once per year, the bank will audit you're A/R and inventory reports to determine their validity.
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