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How Different Industries Can Use a Line of Credit
March 26, 2018
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How Different Industries Can Use a Line of Credit

As a small business owner, credit is something that’s inherently valuable. With a line of credit, your business can pay off your old debts, or expand quicker than would otherwise be possible.

While a line of credit is something that obviously comes with a cost (the interest rate), extending your business’ ability to spend can often be extremely beneficial. In this post, we’ll explain how a line of credit can help businesses in various industries.

6 Industries That Benefit From Having a Line of Credit

1. Restaurants

As your restaurant becomes more popular, the number of people you can serve per hour becomes an increasingly important figure. If your restaurant is understaffed during busy times, people will leave due to long wait times, and you’ll miss out on potential profits.

With a line of credit, you can hire more employees without having to dip into your restaurant’s existing equity. In addition, a line of credit is almost always necessary for restaurants that want to open a new location.

2. Retail Stores

Retail businesses are another industry in which a line of credit can be quite useful. In the retail industry, effective inventory management is incredibly important. Credit is often necessary to purchase the inventory needed to be profitable.

If your business can buy inventory in bulk, the cost of acquiring each individual unit will usually be less. Having a reasonably priced credit line can significantly increase your business’ profit margins.

3. Construction Companies

Construction companies have a strong need for credit because a significant portion of their costs are incurred before a sale is made. In addition, construction equipment can be very expensive. Due to this, most businesses in the industry start out in debt and then slowly work their way to financial independence over time.

Suppose your construction company needs $1,000,000 worth of equipment to be fully functional. Even if each project yields $100,000 worth of profit, this still means you’ll require ten projects to break even. Without a line of credit, doing this would simply be impossible.

4. Manufacturing Firms

The manufacturing industry, like construction, generally requires a heavy investment upfront prior to generating a profit. In fact, credit is something that is almost universally required by any businesses that rely on heavy and expensive equipment.

Because your manufacturing company depends on the performance of its equipment to succeed, a line of credit may be necessary in the inevitable event that equipment breaks. Though straight-line depreciation may address the need to replace equipment from an accounting perspective, it often fails to consider the unpredictability of the real world.

5. Wholesalers

The wholesale industry operates in a straightforward manner. To maximize profits, you’ll almost always want to sell its goods in the largest bulks that it possibly can.

If a potential client comes to you and requests an order your business doesn’t have the capacity to fulfill, they’ll likely take their business elsewhere. Having a reliable line of credit makes it possible for your business to land bigger buyers than you’d otherwise have access to.

6. Medical Practices

One of the reasons that medical professionals need access to a line of credit is that accounts receivable can often take months, even years, to come to fruition. To avoid low cash flow, a line of credit can help your medical business smooth the unpredictability of future cash flows.

In addition, medical equipment can be very expensive. Although you could wait until you’ve been in business for a while before expanding, using credit can make it so your business is able to expand right away. This can also help increase the legitimacy of your business and make it possible to treat a greater variety of individual conditions.

Conclusion

Seemingly every industry can benefit from using a line of credit in some way. Having a line of credit can help your business grow, improve its equipment, pay off debt, and increase its financial viability. Though applying for new credit is obviously something that shouldn’t be done recklessly, the potential usefulness of having access to additional capital is universally apparent.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Andrew Paniello
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Andrew is an experienced writer with a degree in Finance from the University of Colorado. His primary interests are investing, entrepreneurship, and economics.
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