Payroll + Workers Comp + Insurance = Potential Cash Flow Problems
If you’re like me and run payroll biweekly, there will be two months each calendar year where payroll is paid 3x in one month! Depending on your client payment cycle(s), this may result in a slight (or not so slight) cash flow issue – aka you don’t have enough business funds to pay for a potentially large expense like payroll, workers compensation payment, or insurance payment. If feasible, you can temporarily move money from a personal account to the business account or borrow money from family/significant other for a few days (or more) until the next client payment cycle. While this quick-fix solution may suffice during early stages of business, it is likely unsustainable as the business grows and expenses increase. This why you may want to consider getting a business line of credit.
Business Lines of Credit: Explanation + Options
A business line of credit (LOC) is a flexible financial product that allows your business to borrow up to a certain approved amount of money (let’s say $20,000). Once approved, you are able to borrow a portion of the limit (as little as $1,000, depending on the lender) or the entire amount – and you only pay interest on the amount borrowed. There’s typically a set repayment schedule, but as long as you haven’t hit the limit, you’re able to continue to “draw” from the line of credit. This process is similar to a credit card, but with funds being borrowed & deposited to your business checking account as cash.
There are two common types of lenders for LOC: online & banks. Online lenders such as StreetShares or OnDeck are both extremely popular options. You’ll typically need a credit score of 600+ (the higher the better rate), 1+ years in business, and about $100,000+ in annual revenue in order to qualify. Rates will range from around 10% to 30% for qualified businesses. The application process is usually quick and easy and will require some financial forms or bank statements showing revenue & expenses – essentially, they need to calculate your ability to pay back the LOC draws. The other type of lender is a traditional bank such as Wells Fargo or JPMorgan Chase. You will need to apply in-person and the process may take much longer to get approved. However, the LOC rate will most likely be more favorable, especially if you have a standing relationship with that particular bank. I’ve seen most rates at around 5% to 12%, depending on the usual factors (credit score, business income, PRIME rate, etc). Another positive aspect of going with a traditional bank is the ability for the LOC to be directly connected to your business checking account, which means your funds drawn will be deposited into your business checking account very quickly.
In summary, there are several reasons why you may need to explore getting a business line of credit for your growing pet care company. Whether it’s helping to cover large expenses such as payroll, annual workers comp, or annual insurance payments, it can be an extremely flexible and useful tool for your small business. The two primary types of lenders each have their pros & cons. Online lenders will have a quicker application process, but at the expense of a (likely) higher rate. Traditional banks will require a lengthier (not always) application process, may require more forms and statements, but will almost always give you a more favorable rate. Regardless, it’s best to speak to an accountant or bookkeeper to make sure it’s the right cash flow solution for your pet care company.