Welcome to Part 2 of our 2018 Small Business Guide to Lines of Credit. In this series, we’re answering some of the most common questions that small business owners have about getting the funds to grow their businesses, choosing between funding options, and using those funds wisely. Today, we’ll explore six ways you can use a line of credit to boost and grow your business.
A line of credit is a pre-agreed amount of money that you can borrow when you need it, and repay back when you don’t. As such, it’s a useful and popular tool that businesses use to overcome gaps in cash flow and grow. With access to extra funds, small business owners can often accomplish more, faster.
So how can you use a line of credit? How are small business owners taking advantage of this flexible financing option? Let’s dive in to explore some of the most common ways.
1. Hire More Employees to Meet Growing Demands for Your Services
Cash flow problems are part of the ebb and flow of small business ownership, but when cash is tight holding off on hiring seems inevitable. SmallBizTrends reports that 90% of small business plan to hire one or two employees in 2018, but concerns about budget constraints (23%) could put a dampener on hiring plans. But if you want to grow your company and meet the demands of work coming in, you need to hire. Without proper staffing, customer service, and quality control, customers will be unsatisfied, and your business will suffer.
Here’s where drawing on a line of credit can help.
With a business line of credit, your approved business can access funds to support your hiring plans, when you’re ready. A business credit line is simple to use, especially if you’re used to using a business credit card. Once you receive your funds, you can pay off the business line of credit to replenish it, and use it again when the next need arises. If you’ve used a credit card, then you are already familiar with how this works.
The key is to apply and get approved for a business line of credit when your business is in a sound financial position, and before you need it. If approved by Fundbox, you can use the funds toward your next project as soon as the next business day.
The key is to apply and get approved for a business line of credit when your business is in a sound financial position…before you need it.
2. Invest in the Staff you Have
One budget item that often gets slashed when cash flow is tight is a business’s investment in its number one asset: employees. Training, mentoring, incentive programs, employee perks, and more. None have to be costly and the return on investment is worth dipping into your line of credit for. Having a solid employee development plan can help educate and train staff so they can produce the most value for your business.
Think of it as an investment in promotable employees. Investing in your staff increases their engagement, which improves their performance, builds loyalty, and improves your business reputation.
Investing in your staff increases their engagement, which improves their performance, builds loyalty, and improves your business reputation.
3. Up Your Marketing Game
Another area that often gets cut in a cash crunch is marketing. But marketing is critical to business growth and the retention of existing customers. If you don’t work to keep your name out there, prospects and customers will forget about you. A line of credit can help you keep marketing functions going.
You can use the funds many ways, for example: Invest in a freelance writer to post amazing content on your blog and up the ante of your email marketing. Buy ads in new markets to help expand your reach. Boost your social media profile with customer references and viral content (think video tips, how-to’s, and so on). Host events and seminars to showcase your thought leadership and build vital connections.
A line of credit can help you keep your marketing functions going.
4. Purchase a New Piece of Equipment
A line of credit can offer easy access to cash for equipment purchases. For example, if you need to purchase a new piece of foodservice equipment to meet your growing restaurant business needs. A line of credit is best used for smaller equipment purchases. Because interest rates aren’t fixed, they can fluctuate with market conditions and your repayment history. This could lead to a higher payment over time on high-ticket or major equipment purchases. In cases like these, a term loan may be a better option, since rates are fixed, though these are harder to get.
As you weigh up your options, consider how much cash you’ll need upfront. If you have time to pay off the purchase or it doesn’t have a huge price tag, a line of credit can be a useful option. For example, Fundbox Direct Draw allows you to draw funds in increments over $100, up to your credit limit, whenever you like – so you can pay off your equipment payment upfront or over time.
As you weigh up your options, consider how much cash you’ll need upfront.
5. Safety Net Payroll During Slow Seasons
As sales momentum slows down, no amount of planning and preparation can prepare you for the challenges of a quiet season, such as meeting payroll. Laying off employees or reducing their work week during this time isn’t an option for growing businesses who need experienced employees on staff to plan for and be available for busier times.
If cash flow is tight and you don’t have cash reserves, a line of credit is a useful safety net that can help you make payroll during slow times like these. With funds transfer as soon as the next business day, a line of credit gives you the flexibility to meet short-term payroll needs. Once your busy season starts, you can repay and continue onward and upward.
If cash flow is tight and you don’t have cash reserves, a line of credit is a useful safety net.
6. Boost Your Inventory
As you prepare for a sales push, a business line of credit is ideal for overcoming short-term working capital needs such as inventory purchases. This is particularly true of seasonal businesses who need inventory before they have the money to pay for it. It’s also true for businesses with inventory that turns over quickly, making a long term loan less desirable. Or, perhaps a wholesaler has a great deal on a product that you’ll need later.
With a line of credit, you can handle all of those situations. You can make your inventory purchase now at a bargain price, then sell it once it’s in season. Once that inventory is sold and you’ve made a profit, you can repay your line of credit and use it another time.
Whatever your plans for using your line of credit, don’t treat it as a long-term solution to financial woes. Instead, think of it as a short-term source of cash that’s there when you need it and, when used responsibly, can help you maintain a path to growth.
Thanks for reading our Small Business Guide to Lines of Credit. If you missed Part 1, catch up here. In our next article in this series we’ll tackle the challenge of choosing the right line of credit for your small business.