Small and medium sized enterprises (SMEs) effectively use a business line of credit facility for a range of reasons and purposes. One of these uses is as a financial safety net for the business itself.
Financial stability provides a foundation from which SMEs can grow and ensure their resilience during unpredictable markets, changes in supplier/consumer demand, and seasonal fluctuations.
What is a Financial Safety Net for Business?
A financial safety net provides businesses with a buffer of accessible working capital to help weather the storm between short-term disruptions and long-term financial goals. It provides accessible funding that can be drawn upon quickly when needed most. For example; to manage unexpected costs, cover critical expenses during fluctuating moments of cash flow, or maintain operations during unusually challenging times.
Why do small and medium sized businesses need a financial safety net?
For one thing, business is less predictable for SMEs than for larger enterprises. Secondly, cash flow can be tighter thanks to smaller margins and smaller cash reserves. Additionally, even relatively small shocks, such as late customer payments or geopolitical factors affecting local markers, can have outsized impacts on smaller businesses.
A financial safety net can be the critical factor that determines whether a business can bounce back from a setback or fall behind indefinitely.
What is a Business Line of Credit?
A business line of credit is a flexible financial facility that allows businesses to access working capital when it is needed. The money borrowed is paid back and then the funds are accessible to be borrowed again, in a similar way to a personal credit card.
Unlike a business loan where one is committed to drawing a lump sum and then paying back that principal amount with interest on the entered sum, the line of credit is more like a revolving account. Your business can access a set credit limit as and when the need arises.
How Does a Business Line of Credit Create a Financial Safety Net?
1. Access to Working Capital
First and foremost, a business line of credit ensures access to working capital whenever it is needed but not a second before or for a dollar more. In other words, when an unexpected expense or opportunity presents itself, your business can draw on the money it needs and only pay back that amount, with interest. The revolving nature of the business line of credit means that this access to working capital is not a once-off arrangement but an ongoing financial safety net for the business.
If a supplier offers a bulk-purchasing discount for which you need funds, or an unexpected slump in market demand means less revenue, a line of credit can provide the quick liquidity you need to clear the hurdle and smooth over the cash flow for the period.
2. Quickly and Easily Accessible
It is not just the flexibility in fund access that makes a business line of credit such a good safety net: It is the speed at which funds can be accessed as well. Once your credit facility is approved, you can access the funds you need instantly.
Even the approval process is significantly faster than traditional business loans which will allow your business to quickly and easily access the emergency funds it needs to deal with the unpredicted or take advantage of the unexpected.
3. Reduced Interest Cost
A business line of credit avoids some of the more restrictive and burdensome aspects of business loans by not forcing you to pay interest on the full credit limit. Instead, this emergency cash reserve can be drawn on not only when you need but however much you need. In that way your small or medium sized business can put more cash towards operations and growth rather than paying off its debt. It’s a dynamic safety net that is always there but not always costing you.
4. Avoiding Personal Financing
Some SME owners lean on access to funds through personal credit cards or even mortgages to weather storms and relieve cash flow pressure. This can put one’s personal financial stability at risk. A dedicated business line of credit assists with effectively keeping one’s business and personal finances separate without compromising the financial stability of the business itself.
5. Flexibility in Use
The right financial safety net for a business needs to come without strings attached on how those funds can be used. With a line of credit, your business can cover everything from payroll to rent and help to fill in gaps in cash flow during downturns or make smart growth moves when the market presents the right opportunity.
6. Supportive of Growth
A business line of credit provides a great financial safety net for SMEs not just because it works well in emergencies, but also because it supports growth and resilience as well. Beyond just covering shocks to cash flow, it provides business owners with a sense of confidence to think beyond their immediate working capital constraints and focus on bigger picture success. Knowing that financial safety net is there to catch them when and if they need it allows for bolder decision making and more focus on running a successful business.
ScotPac – the expert in constructing financial safety nets for business
The team here at ScotPac have been providing financial safety nets for businesses across Australia for over 35 years. Throughout this time, we’ve worked with businesses to understand their needs, their objectives and their financial concerns so that a tailored business finance solution can be found that works for them.