Lines of credit have been one of the keys to cash flow management for businesses ever since their inception. While there are other models that sometimes work better because of their focus on a specific individual business model, the value of the credit line is its flexibility and ease of use for practically any company. Where asset financing is heavily dependent on your business cycle and available assets, a credit line secured with equipment or real estate equity has a low interest rate, it’s reusable without reapplying once you have a balance available on the account again, and it can be used for flexible working capital.
1. Secured Credit Lines Keep Costs of Capital Down
Business lines of credit are very different from credit cards. Not only do they allow you to draw cash, they are usually considerably less expensive in terms of interest. Secured credit lines are often comparable to a commercial mortgage for rates, with their exact relationship being dependent on the exact structure of your credit line. The lower the LTV on your asset, the lower the interest you generally pay. In situations where a default would still create a profit for the lender, they tend to give pretty generous quotes on interest.
2. Repay, Reuse, Repay… But You Don’t Need To Reapply
Reusable means different things to different financing professionals. To asset lenders, it means you can take a new advance on an asset as soon as the old one is paid off. To the people who manage lines of credit, though, they mean you can just draw on any open balance as if it is cash. No need to go through the process of drawing a cash advance that marshals all your resources right away, and no need to reapply when you need your next infusion of working capital. Just keep the account in good standing, then use it as needed.
3. Flexible Working Capital With… No Interest Cost?
Credit lines tend to be structured in ways that offer you grace periods where you can take money out and repay it before the first time the interest is assessed. Sometimes that is because interest only compounds after the debt hits a certain age, like a standard 30 days. Other times it is because there is an explicit perk in the lending agreement like 60 days same as cash. If the ability to take short bridge advances from your credit line without any cost beyond its annual fees, shop around for a generous grace period you can make full use of and get the cash you need when you need it. Even if the bigger zero interest window costs you some points on the rate overall, it could save you money if you use it enough.