Business Credit Line Basics
Lines of credit are among the most commonly used financial instruments by both companies and individuals, and for good reason. They can be set up with very flexible parameters, providing a lot of options for reusable financing without a huge overhead cost. Depending on your needs, you can secure them with assets to lower interest and make long-term projects cheaper to fund, or you can opt for unsecured lines with short but useful grace periods before interest is assessed, allowing you to draw on capital when you have expenses to meet and incoming cash has been a little low. So what do you need in a credit line for your business? It depends on your goals.
Differences Between Credit Lines and Credit Cards
Many businesses look to unsecured credit as a cash management option because it consolidates outgoing expenses and purchases into an easily verified list that can be paid at once, once a month or so. While both credit lines and cards can do this, the best one for the purpose depends on the kind of expenses being covered. Lines of credit allow cash deposits into your bank account, so you can use the capital as you would any other working capital for your business. It’s not limited to the purchase of goods or payment of services. It does require more tracking to know where the money goes and to evaluate the return on the costs of capital.
By contrast, credit cards are useful in place of cash when you need to make purchases for your company. They’re great for online payments and ordering, as well as for petty cash management, but they do not have as broad a range of applications as credit lines. The costs for capital are very close between the instruments, though.
Credit Line Interest Management
Often, lines of credit have fairly high interest costs when evaluated on an annual basis, but they also tend to have grace periods during which you can repay without any interest cost at all. Even if interest is assessed, a high annual rate can still translate to a low overall cost of capital if it’s only for a month or two. The key to cost-effective credit line management is knowing when you need something that has lower costs over a longer term and when you’re going to be able to pay back the credit in a timely way. Once you learn that, it’s easy to fit this tool into a larger cash flow management plan.