Benefit: A business line of credit improves your cash flow by offering a reservoir of funds that can be accessed as needed.  Generally, within 24 hours, you can have the funds in your account.  There are small carrying costs to have the Line open, but this is negligible. 

Example: For digital businesses, there might be seasons when the sales of their products or services are slower (like a software company after a major release). Having a line of credit ensures that during these slower periods, the business can still cover operational costs without depleting its reserves.

Benefit: Unlike term loans that provide a lump sum amount, a line of credit gives businesses the freedom to draw funds only when necessary, ensuring you only pay interest on the amount you've used.  Better yet, the interest is tax deductible.  In times of rising interest rate, so long as the funds are used for business purposes, you will naturally have a lower post tax interest rate. 

Example: A digital marketing agency might land a large client but needs upfront funds for campaign expenses. With a line of credit, they can access the exact amount needed and repay as their client pays them.  PRO TIP - We would recommend building the interest cost into your engagement, so you are made whole. 

Benefit: Unexpected expenses or downturns can strike any business. A line of credit can be a safety net during such times.  We saw countless businesses saved by having a healthy LOC during the early days of Covid.  We cannot stress how important this was for many businesses that faced shutdowns.

Example: A sudden server crash for an online retailer could mean unexpected costs for repairs or replacements. Instead of panicking, the business can utilize the line of credit to quickly address the issue without impacting other areas of operation.

Benefit: A ready line of credit allows businesses to seize growth opportunities quickly.

Example: An e-commerce platform might spot a trending product. With a line of credit, they can stock up on inventory immediately, capitalizing on the trend before competitors.  Without this, they would need to rely on cashflow or existing banking reserves. 

Benefit: By ensuring that funds are always available, businesses can negotiate better terms with suppliers or even avail early payment discounts.

Example: An app development company can use their line of credit to purchase licenses in bulk, availing quantity discounts, and ensuring they always have the resources for client projects.

1. Equipment Purchases: Digital businesses often require the latest technology. Use your line of credit to finance these without waiting.
2. Talent Acquisition: Hire top talent when you find them, not just when you have funds in hand.
3. Marketing and Advertising: Launch campaigns when the market demands, not only when you've saved up for it.
4. Research and Development: Stay ahead of competitors by investing in R&D projects using funds from your line of credit.  Most of our tech companies are utilizing bank lines to bridge the gap between rounds. 
5. Debt Consolidation: If you have high-interest debts, you can use a lower-interest line of credit to consolidate and save on interest costs.

Anomaly Recommendation - Use a local or regional bank to secure your LOC.  Big banks may offer better terms occasionally, but we really believe you need a personal and local relationship for a LOC.  When you need it most, you want to be able to email or call your banker vs deal with the 1800 world.  The Covid days taught us a lot of lessons on this.  Many of our clients who only had large relationships found themselves on hold and unable to access funds (including PPP, which small banks with existing relationships led the way).

1. Immediate Deductions through Section 179 or IRC 168k (Bonus)

Benefit: The IRS allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year under Section 179 or 168. This means, instead of depreciating the equipment over several years, businesses can take an immediate deduction.

Strategically, you can use your line of credit to purchase NECESSARY equipment before 12/31.  Your cash outlay is nearly $0 today and you receive a large tax break. 

Example: Imagine your business takes out a $100,000 line of credit. Near the end of the year, you decide to use $70,000 to purchase qualifying equipment. Under Section 179/168, instead of spreading out the deduction over the equipment's useful life (say, 5 years), you can potentially deduct the entire $70,000 from your business's gross income in that year, significantly reducing your taxable income.

2. Managing and Manipulating Tax Brackets

Benefit: By leveraging these tax deductions from a line of credit, businesses can potentially shift their income to a lower tax bracket.

Example: Let's say your business's taxable income was teetering on the edge of a higher tax bracket. The deductions from the equipment purchase and the interest paid on your line of credit might lower your taxable income enough to keep you in a lower bracket, thereby reducing your overall tax liability.  If you were deciding between purchasing in 2023 vs 2024, the $70k deduction above may bring your family's income into a lower bracket AND increase your 199A deduction!  Remember, the 199A deduction phases out with higher income so this is a neat strategy we've used to recover some of the deduction for some who have "fallen off the cliff".