Business owners are faced with a plethora of challenges on an everyday basis. Some of these challenges may be relatively minor with clear and simple solutions, while others prove to be more complex with long-lasting effects. And while it’s important for owners to be prepared for whatever comes their way, it’s typically financial issues that are the common thread across all types of industries and sizes of businesses.

If your business is going through a time of financial issues and challenges, you may be considering a business line of a credit as a wise solution. Before you go ahead and apply for one, here’s a look at the best way to make use of it, and when it would most make sense.

What is a Business Line of Credit?

Much like a personal line of credit, a business line of credit provides you with funds for your business that you can draw upon when needed. You will pay interest on what you borrow, and there is a minimum monthly payment that you will be responsible for. Unlike with a loan, the monthly repayment isn’t a fixed amount since the amount you will owe will likely fluctuate as you draw on the funds and repay them.

In order to qualify for a business line of credit, there are a number of checks the lender will make on your business, one of which is looking into what the lender believes is the company’s “business score”. Business credit refers to a number of criteria such as public records, background checks, information about the business activities, UCC filings, and more.

Short-Term Funding – The Number One Purpose

So when does it make sense to use a business line of credit? In most cases, it is relied upon for short-term funding. This isn’t meant to be a long-term solution to serious money issues, rather it can help the company if they need additional financing in the short-term for extra inventory, payroll, operational expenses, and supplies.

Some businesses will even use it as a source of working capital during their off-season if their business follows a cyclical system.

Of course, you always want to be sure that you will have the means to not only make those minimum payments but pay the line of credit off, which is why it is meant for short-term issues.

Build the Company’s Credit Rating

A business line of credit can also help businesses to build their credit rating or score. Provided you are keeping up with the payments, it can build your rating, which will then help you to qualify for funding such as a business loan in the future.

You can see how this would be especially helpful for new businesses that are working and struggling to create that established credit rating.

It Can Be an Excellent Solution in the Right Circumstances

So, while you certainly can’t count on a business line of credit to help you out of every financial challenge, in the right circumstances, it can act as a perfect solution.