Small Business Credit Options to Manage Cash Flow

Small business owners quickly learn the importance of monitoring their cash flow. The flow of money in and out of your business can impact everything from the stock you have to sell to keeping the lights on. In a perfect world, your cash flows would align.

All of our customers would pay their bills before your invoices came due. Or you’d pay the food vendor after a busy weekend of full tables in your restaurant. But this isn’t always the case.

Even successful business owners can encounter cash flow problems. You may not have control over when bills must be paid versus when your customers pay. Or unexpected repairs or broken machinery could throw a wrench in your budget. Small business owners quickly learn that having access to capital for emergencies can help them survive and stay in business.

But how do you play for a future event when you don’t know when it will occur? And which loan products would suit your needs?

Business Line of Credit

A business line of credit is an open account which you can draw on at any time. Your banker might have suggested one to you when you opened your accounts with them, and it’s not uncommon for business owners to have a line of credit in addition to their checking and savings accounts.

A business line of credit will have a limit, like a credit card, but lines of credit typically offer much lower interest rates than credit cards. While some banks charge an annual fee to keep the line open for you, no payment is due and you don’t have to pay interest until you draw on the line.

To facilitate this, your bank will give you a debit card or checks to write on the line of credit. It can be linked to your checking account so that, if you overdraft your checking account, money pulls from the line of credit to cover it.

A line of credit is excellent for cash flow management if you can stay on top of it. Let’s say you own a restaurant and have to pay your food and liquid vendors on Friday night, before the weekend rush. Write checks from the line of credit on Friday, then after your weekend receipts have been collected, pay it off. Properly managed, you might never have to pay interest on your line of credit.

Getting approved for a business line of credit can be easy if you have an existing relationship with the lender. They’ll be able to check your cash flow and revenues by looking at your bank accounts. However, sometimes they’ll also request two years of taxes, financial statements that have been prepared by an accountant, and a business plan. What a bank requests will depend upon your risk profile.

Some lenders refuse to work with borrowers in high-risk industries. These industries include gambling, cannabis, and restaurants. While you will be able to find funding, it will be with an industry-specific or alternative lender.

Another plus to a line of credit is that, when you pay off a balance, you can borrow that money again. Term loans aren’t great for cash flow management because when you pay down the principal you’ve borrowed you can’t access any more funds. Lines of credit are one of the most-used cash flow management tools because of their flexibility, ease of use, and renewing nature.

Business Credit Card

Business credit cards are a popular form of capital for many new businesses. In one survey, 7% of startups said that they funded their new venture with a credit card. Credit cards offer access to quick capital, and are an easy way to cover your business’s cash flow problems, but are they right for you?

It’s easier to get approved for a business credit card than a line of credit, but this ease is reflected in the higher interest rate you’ll pay. If you’ve only been in a business a short time, and because credit card applications require less documentation, there is more risk when lending to you. Lenders cover this risk by charging higher rates.

Credit cards are easy to use if you need to cover some business expenses, but not all vendors accept credit cards. You won’t be able to write a check against a credit card the way that you can against a line of credit. This may not matter to your business, however.

Another downside to a business credit card is their rates. Their rates can start at 12% and go up to almost 30%. Read the terms carefully, as many companies will raise your rates if you miss or make a late payment.  You will also likely incur a fee for late payment. With a business line of credit, you can set up automatic payments from a linked checking account to avoid this.

Business lines of credit cards can charge annual fees, similar to a line of credit, but will often offer benefits for those fees. Use a business credit card to earn miles for a free plan ticket to a major trade show. Or apply for a cashback card and have a percentage of each transaction returned to you. If the card’s rewards align with your business and could save you money in another area, consider opening a credit card instead of a line of credit.

Tax Implications of a Business Line of Credit vs. a Business Credit Card

The interest on a business line of credit is deductible providing that you can prove the funds were used for a business purpose. If your bank extended a personal line of credit, keep careful documentation and receipts of how you used the funds for business purposes.

The same caveats apply to a business credit card. The interest is also tax deductible, though you should keep receipts and avoid using it for personal reasons. While you can use a personal credit card for business use and still write of the expense, co-mingling funds and their uses complicate taxes and makes your deductions murkier. To avoid having them challenged, try to run business expenses exclusively through a business credit card or line of credit.

Making a Budget

You may have started your business with a dream and deep knowledge of a specific industry, but along the way, you will have to gain some financial management skills. To manage cash flow issues, create a daily, weekly, or monthly budget.

A budget simply lays out the cash you expect to come into your business and the bills you expect to pay, along with when they’re due. If you’ve never prepared a budget before, enlist the help of your finance or tax professional.

While you should have done this when you launched your business, the reality is that many small businesses who start off with strong cash flow are too wrapped up in other aspects of managing their business to get around to it until cash flow becomes a problem. If this is you, go through several of the past month’s bank statements to get a handle on your typical cash flow cycle. This will help you manage your cash flow, identify where you might need to fill in the gaps, and decide the best product for your business’s needs.

If you’ve been struggling to align cash flow and simply can’t qualify for a business line of credit or credit card yet, try taking advantage of terms. Many invoices will have language such as “2%, 10, Net 30.” This means that if you pay within 10 days, you’ll receive a 2% discount. But you can take up to 30 days to pay without incurring a late fee or interest payments. Work with your budget to delay paying on invoices that don’t require immediate payment and using your cash flow for those vendors that won’t wait to be paid.

Learning to analyze, predict and manage cash flow is a skill. Consider enrolling in an online finance class, or paying a professional to help you at the beginning, when first starting to gain this skill. While you may have set out to fulfill a dream through your small business, dreams are fulfilled in the world of budgets and spreadsheets. Getting comfortable with them helps those dreams come true.

Have a tax question? Contact Qasim Kazim.

Author: Kazim Qasim, AZS Accounting is a full-service accounting firm dedicated to providing our clients with professional, personalized services and guidance in a wide range of financial and business needs.