Whatever kind of small business you’re operating, cash is a constant requirement, and sometimes, even the most well-established and successful businesses struggle with their cash flow management at times. With vendors needing to be paid, customers to serve, and accounts receivable and collections to be managed, more cash may be needed simply for your business to operate, especially when payments aren’t coming in quickly enough.

So what’s the solution?

A business line of credit.

What exactly is a business line of credit?

Often abbreviated to LOC, meaning a line of credit, these are short-term loans that enable business owners to borrow money up to a certain credit limit, and are typically used for such things as payroll or the financing of inventory items.

A portion of the balance of such a loan may be borrowed and repaid a number of times per month, and they have shorter loan maturities in comparison to a loan with a traditional business term.

Would your business benefit from an LOC?

To help you determine whether a business line of credit would be helpful for your businesses operational requirements, here are some factors to consider:

  • Your monthly recurring revenue (MRR)

If you have a significant amount of MRR, business financing may not be necessary for you. 

Referring to the revenue a business can be reliably expected to receive every month, companies with a lot of repeat customers can usually expect this.

But, if your company has a low MRR and sales are difficult to predict on a monthly basis, an LOC could give you the extra working capital you need to stay afloat. 

  • The cost of acquiring customers (CAC)

If you don’t usually spend a lot of money trying to find new customers, your cashflow may be healthier, and an LOC may not be necessary.

Referring to the costs incurred for convincing a consumer to buy your goods or services, customer acquisition cost, or CAC, is something all businesses will want to drive down. Good brand awareness, for example, can help encourage consumer trust. Newer businesses without brand awareness, however, will find themselves needing to spend more money on advertizing and marketing, and this can’t be executed without cash.

  • Your profit margins

Every time your business sells a product at a high profit margin, more cash is brought in, and the need for financing is significantly reduced. If you’re not making much of a profit on what you’re selling, you’ll need a bigger cash outflow, and an LOC could be the solution.

  • Your sales cycle

Making cash flow harder to predict, products that have a longer sales cycle generally produce sales results that are inconsistent, and profits may vary dramatically from one month to another. If this is the case for your small business, an LOC could give you the funds you need to manage your cash flow.

While lines of credit can be helpful in the short-term, they aren’t a sustainable solution to cashflow problems, and if you’re not able to generate any positive working capital, you might not be eligible for a business line of credit. The most important consideration when it comes to short-term financing, is your ability as the owner of a business, to repay the loan over a period of months (not years), which is naturally dependent upon a certain amount of cash inflow.