Most businesses experiences cash flow ebbs and flows from time to time. Here’s how the right credit products can help level things out.
Steady cash flow is vital to the financial well-being of a business. But with healthy cash flow being subject to numerous factors — both internal considerations like payment policies and external factors like seasonal fluctuations — reaching financial stability can be a complex equation.
Even the type of business you run can affect cash flow struggles. For the most part, medical professionals and attorneys seem to have more stable cash flow. Manufacturing businesses, however, experience ebbs and flows on a pretty regular basis. Newer businesses, as well, tend to have more instability than established ones.
Credit products can potentially smooth out cash flow needs over time. Depending on whether a business needs access to credit on a quarterly, monthly, or even weekly basis, the owner can leverage credit cards, lines of credit, and loans to help stabilize cash flow. Determining which product is right for you comes down to how quickly you plan to pay it back. Here is some basic information on each of these options.
When to consider a line of credit
If a business owner needs to buy additional inventory or cover short-term payroll needs, a line of credit will allow them to do so. A line of credit provides businesses the flexibility to use as much (or as little) financing as they need and to pay it off either immediately or over a period time — whichever makes the most sense for their situation.
When to consider a loan
A loan is a longer commitment — usually between 12 months and five years. A loan typically offers a lower interest rate than a line of credit, and you have to pay a set amount each month. Many small businesses like to be able to budget for that expense each month.
When to use a credit card
It’s best to reserve credit cards for purchases that are small enough for you to pay off the debt by the following month. It’s not smart to use credit cards for large purchases due to the higher interest rates. You may be better off using a line of credit, or even a loan, for those large purchases.
What else to know about cash flow
As you continue to explore the various types of credit available to you, ask yourself questions like: Is now the right time? In the case that I face a negative cash flow, do I have a contingency plan that will allow me to make my payments on time? Peace of mind is everything. If you know you have the ability to tap into credit in case anything comes up while running your business, you’ll be able to concentrate on actually running your business rather than how you’re going to cover expenses.