Cash flow management can be the toughest thing to master when you start a small business, especially if you are in an industry with unpredictable demand cycles. The best way to deal with inconsistent income distribution is to build in resources that allow you to borrow against the income you’re reasonably sure is coming when demand shifts or current accounts pay off invoices. Lines of credit have long enjoyed a preferential status among small business owners for this purpose because they are simple, accessible, and their costs are predictable. So how do you go from application to total cash flow management?
1. Separate Cash Flow Financing From Other Credit
The first thing you need to do is commit to the idea that your credit line for cash flow management is just that. It is not general working capital for short-term opportunities. It is not designed to accommodate unusually large orders that will require staffing up. There are options to finance those things, but if you tap your cash flow management tool to do it and then you run into cash flow issues, you won’t have the resources you need to keep your business running smoothly.
2. Use Real Estate Assets To Access Larger Lines of Credit
You can usually find a provider who will quote you a business credit line with no assets to secure the debt. The rates tend to rival credit cards, though, as do the credit score and income requirements. That means they tend to have low limits and high costs. Secured credit lines are much less expensive because they are based on the value of the asset, and the lower the LTV on the credit line, the lower the interest costs.
If you want a comparison to a personal finance product, it’s the reason your home equity credit lines tend to be so inexpensive. The credit line is a fraction of the value of the home, so interest rates are controlled.
3. Take Advantage of Interest-Free Grace Periods
Most lines of credit offer you a brief window where you can take out money and repay it before there is a finance charge. If you can manage to only use them within those brief windows, the only costs to the credit line are your annual fees. Of course, that’s almost never how it works.
Still, even a few interest-free transactions can add up to a big savings when coupled with controlled interest rates and a habit of paying off the line entirely whenever you have windfall profits. That’s the recipe for easy cash management with a credit line, the rest is just fine tuning your habits to your business’s unique cash flow cycle.
