A short-term line of credit provides several advantages, including taking care of your business’ immediate financial obligations. Your company may qualify for a line of credit once you provide documentation to show you have a stable cash flow. Before you sign the loan papers, confirm that the terms of the credit line realistically meet your business needs so you receive all the advantages this source of money offers.
Many short-term lines of credit for businesses with high credit ratings require no collateral. Unsecured lines of credit mean you won’t lose your property if you’re unable to make the monthly payments. Some banks require that you pay back the line of credit from your accounts receivable or the sale of inventory if you default on the loan.
Some companies use their line of credit to make payments on vendor invoices that give them discounts for paying early. The discounts may total more than the interest due on the line of credit, offering the company savings.
A short-term line of credit comes in handy if your cash flow is not sufficient to maintain rapid growth. You may also find a need for more inventory as your sales increase. A credit line is ideal for obtaining the goods you need now rather than waiting until you save enough money to buy more. Some banks offer asset-based lines of credit that allow you to borrow the maximum amount possible based on accounts receivables and inventory. Companies that experience seasonal growth also find a line of credit helps them cover expenses during peak demand times.
Some short-term lines of credit are revolving. As you pay back the principal, that amount becomes available in case you need to draw from it again. You only pay interest on the outstanding amount. This type of short-term credit is usually available without reapplying as long as you make the minimum monthly payments. Before you sign the loan documents, find out how to access your line of credit to ensure you can get the cash you need on a timely basis.
Opening a line of credit may help you improve your credit history. The best time to open a line of credit is when your finances are in good shape, and you don’t actually need the credit quite yet. Once you start using the money, make each month’s payment on time to help improve your credit rating. In turn, you may be able to access a larger line of credit down the road.
Nancy Wagner is a marketing strategist and speaker who started writing in 1998. She writes business plans for startups and established companies and teaches marketing and promotional tactics at local workshops. Wagner's business and marketing articles have appeared in "Home Business Journal," "Nation’s Business," "Emerging Business" and "The Mortgage Press," among others. She holds a B.S. from Eastern Illinois University.