Solving Cash Flow Challenges Using a Line of Credit

Author: Armando Martinez, Senior Vice President, Commercial Lending Division 03/18/2021

Your business’ cash flow may not be predictable from month to month, which can create challenges for paying business expenses, expanding into new opportunities, or building a robust team. Despite inconsistent cash flow, there are financing options businesses can consider to help meet their goals. Establishing a line of credit could be an effective way to solve cash flow challenges.

What is a Line of Credit?

A line of credit is a predetermined amount of credit that a financial institution makes available to you to use when and how you wish. The advances to a borrower’s checking account are typically credited the same business day. The line of credit is often used to fund the timing difference between the billing of services rendered or goods sold and a company receiving the cash in their account. In turn, you only pay interest on the amount advanced. Borrowers can pay back principal on a line of credit at will and can tap or request that available liquidity at any time.

Why Use a Line of Credit?

When considering when to use a line of credit, it’s important to note the difference in various lending options. Lines of credit are not often used for a one-time purchase like a car or property. A loan or mortgage is used to fund long-term capital needs and typically paid off over a period of several years, whereas a line of credit is considered short-term capital and traditionally paid within 12 months. The following are common uses of a line of credit.

Gaps in revenue

If you’re a small business with irregular monthly income, looking to finance a new project, or experiencing unpredictable delays between performing work and collecting payment, a line of credit could help relieve those gaps in revenue. This can keep your business running smoothly through periods of unpredictability.

Safety net

Depending on the strength of the borrower’s balance sheet, there are instances when an unsecured line of credit may be approved, but most require collateral such as accounts receivable, inventory, or hard assets such as real estate. These types of credit facilities are an open-ended lending option that allows the borrower to have access to immediate liquidity up to the approved line of credit amount. The timing difference between a company’s billing of accounts receivable, funding of new inventory, or funding an asset purchase while awaiting the sale of another asset are common situations for using a line of credit. Having this safety net of available credit can help business owners transact with confidence to better serve the interest of the company owners, shareholders, and customers.

Solving Cash Flow Problems

Unexpected expenses

Without consistent cash flow, addressing unexpected expenses can be challenging or even impossible. From equipment maintenance and repairs to unexpected hiring needs, businesses must be agile when it comes to their finances.

Office space

With good and clear communication with your loan officer, even office expansion could be a viable use of a line of credit. Under this scenario, a business owner typically has a good reason to get started immediately with an expansion using a line of credit (short-term capital), but then a second loan would be made to pay off the line of credit and issue a long-term mortgage payable over several years and secured by the office space where the expansion took place. However, it is important to have a detail discussion with your lending officer beforehand.

Very Important questions must be answered up front such as:

Payroll

If your business experiences gaps in cash flow it could impact your ability to meet payroll. In order to keep your employees paid and avoid disruption, a line of credit can provide the liquidity to stabilize income so that payroll is not affected while a company’s accounts receivable are collected.

Marketing

Your company may be interested in building out a marketing team to increase brand awareness and sales. However, due to limited cash flow, it may be difficult to establish a reasonable marketing budget without a line of credit. This financing options allows you to take the necessary steps for your business to flourish.

Is a Line of Credit Right for You?

If it sounds like your business could benefit from a line of credit, PlainsCapital Bank’s trusted team of small business advisors can help you explore the best options for financing your business, investment, or project. Our experienced banking professionals are equipped with the tools and expertise to help you make the right choices for your small business to solve cash flow challenges. Call us today at 866-762-8392 to learn more.

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