The following is a guest post from Jeanna Barrett, of Kabbage, a company that's an online provider of working capital.
When most people think “loan,” they think of an installment loan. With an installment loan, you borrow a set amount of money and pay off a portion of that (plus the interest, of course) each month until it’s all been paid off. Your mortgage and car loan are examples of an installment loan, as is the equipment loan you took out to get your office up and running.
A revolving line of credit works more like your credit card. You have a maximum amount of money you can borrow – a credit limit – and you take what you need, when you need it. You pay back a minimum of that amount each month, usually based on how much you’ve borrowed.
Here are a few of the situations where small business customers have leveraged the power of revolving credit to make their business prosper:
- Seasonal Businesses love revolving credit lines. As the busy season approaches, it’s time to stock up on reliably popular items and make a promotions push…both of which require funds that a long, slow season might have depleted. At the depth of the off-season, a business might need some funds to keep going long enough to make it through.
- Opportunity Knocks but once, and revolving credit lets you open the door. For businesses without cash reserves, using a line of credit to seize the day can be the best way to take advantage of an opportunity that would otherwise be missed.
- Slow Paying Clients can threaten the life of a business, especially when businesses rely on a handful of high-value clients for most of their business. Though this might feel superficially like a “payday loan,” a good revolving credit line is far from that. It’s a way to handle your commitments – and sometimes deliver your product – without having to establish restrictive payment terms.
- Bridging the Gap between no credit and big credit can be a challenge since the joke about “banks only approve a loan you can prove you don’t need” is truer than banks like to admit. The new trend is toward online loans from lenders such as Kabbage, which uses methods of measurement other than your FICO score to decide whether or not to lend and also offers the flexibility of a revolving line of credit instead of an installment loan.
- Emergency Response may be the most important advantage of a line of credit. If you suffer a loss from theft or heavy weather, for example, you wait longer for insurance to pay out than the life of your business can usually stand. And if the loss is uninsured, a line of credit is exactly the kind of short-term, fast-acting cash you might need to survive.
- Making the Leap from one-man shop to employees, from part-time employment to full-time entrepreneurship or from a small location to a larger one, depends a lot on timing. Jumping too early means taking on extra expenses before your business can pay for them. Jumping too late can mean capitalizing only partially on the benefits of expansion. A revolving line of credit means having the funds available for timing to be the only factor in when you make your move.
- Major Events ranging from an upcoming promotion to a busy season when you want a leg-up on your competition, call for short-term cash flow.
- The Credit Snowball is usually discussed in terms of personal credit, but it’s just as powerful for businesses that borrowed deep to get started. You can use a line of credit to consolidate multiple loans for a lower monthly payment, or to subsume higher-interest loans, so you’re in control of how you pay off your debt.
There are no silver bullets or foolproof plans for business success – too much luck and too many other factors beyond your immediate control are involved in something as complex as a company’s lifespan. That said, flexibility and the ability to act on opportunity are two of the best indicators that a small business will go the distance. Revolving lines of credit provide both of those things.
Jeanna Barrett is Head of Inbound & Content Marketing for Kabbage, which pioneered the first financial services data and technology platform to provide small business loans. Unlike other lenders, Kabbage looks at your business data, not just a credit score, through our fully automated, online loan application. Kabbage has grown to become the #1 online provider of business working capital and is a Forbes Top 100 Most Promising Company.
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