Inside: Learn how a line of credit works, and how it can help you manage your pharmacy’s finances.
In a retail business like an independent pharmacy, cash flow is never completely predictable. During lean months, you still need to pay your bills, and that’s when a line of credit can come in handy.
What is a line of credit?
A line of credit is a revolving source of funds that is available to you at any time. Once you establish a line of credit, you can treat it as a part of your pharmacy’s working capital and use it to pay for short-term expenses, even when you don’t have enough cash on hand.
Most business lines of credit are unsecured debt, which means you don’t have to provide any collateral to the bank. Because of this, the interest rate for most lines of credit tends to be variable rather than fixed.
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Why use a line of credit?
A line of credit can come in handy in a pinch, and it has a few advantages over other types of funding.
Funds when you need them
With a line of credit, funds are there when you need them. At the same time, you’re not obligated to use them.
If you take out a traditional small business loan for $15,000 and then only use $10,000, you still have to pay back $15,000 — including interest.
A line of credit allows you to withdraw funds at your discretion, taking only what you need. You also don’t have to go through the song and dance of a loan application every time you decide to use your line of credit. Once you’re approved, that credit will always be at your fingertips.
Revolving credit
Most lines of credit are revolving. That means if you have a $10,000 line of credit, use $5,000, then pay that $5,000 back, you will have $10,000 worth of credit at your disposal again.
This is an ideal option for small businesses, because it provides a continuous source of funds. With a line of credit, you don’t have to take out one business loan for an automation tool and then take a second loan out in order to purchase new shelving.
As long as you’re paying back your line of credit, you’ll be able to keep pulling funding from it.
Lower interest rates
A business credit card is also a revolving source of credit that can be used at any time. So why get a line of credit on top of your credit card?
In a word: interest. Lines of credit tend to come with much lower interest rates than a typical credit card. That means if you need to make a purchase that’s going to take you more than one month to pay off, you’ll incur much lower overall costs if you use a line of credit instead of a credit card.
Some lines of credit have higher interest rates than others, so do your research before taking one out to ensure you’re getting the best interest rate possible. Interest rates on lines of credit are also typically higher than those of traditional term loans, which is something to keep in mind as you explore your financing options.
How to use your line of credit
Once you have a line of credit at your disposal, here’s how you can put it to work for your pharmacy.
Regular expenses
A line of credit is perfect for those months when you have bills due and you know your reimbursements are coming but they haven’t arrived yet.
Treat a line of credit as an extension of your cash cushion. Instead of stretching yourself thin, missing payments, or using a high-interest credit card, a line of credit can help you fill in the gaps.
Once those reimbursements do come in, pay your credit back promptly to restore the amount of credit available to you.
Build your credit score
Like individuals, businesses have credit scores. Banks use this score to determine if they want to extend you a loan, and vendors may even use your credit score to determine what kind of payment terms they want to extend to you.
If your pharmacy is brand new, you may not have enough credit history to have a good score. By taking out a line of credit, you can build that history. Every on-time payment toward a line of credit demonstrates that your pharmacy is financially reliable.
Bigger purchases
Use your line of credit for one-time purchases that are too big to put on a high-interest credit card but too small to justify taking out a small business term loan.
Think about the small upgrades you have been putting off making in your pharmacy because you don’t have the money to pay for it all at once. Because the line of credit is always available to you, making these purchases with a line of credit is hassle-free.
Surprise expenses
Sometimes, things just go wrong. Your delivery vehicle gets in a fender bender, your computer goes haywire, or something in your pharmacy needs an immediate repair.
A line of credit will be there for you when those surprise expenses pop up. Instead of scrambling to pull the money together or spreading out payments across credit cards, you can rely on the funds from your line of credit to cover the urgent expenses you aren’t able to budget for.
TIP: Get a line of credit before you need it
If a line of credit is something that sounds appealing for your pharmacy, work on securing one sooner rather than later.
While they are often easier to obtain than a small business loan, banks will still want to see information like your profit and loss statement and balance sheet. Most banks won’t grant you a line of credit if you’re in a poor financial situation, which is when you need a line of credit the most.
Instead, you should establish a line of credit when you’re in a good financial position. That way, if things go awry financially, you’ll be able to dip into your line of credit without delay.
A Member-Owned Company Serving Independent Pharmacies
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy-side of their business. Founded and owned by pharmacists, PBA Health serves independent pharmacies with group purchasing services, wholesaler contract negotiations, proprietary purchasing tools, and more.
An HDA member, PBA Health operates its own NABP-accredited secondary wholesaler with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products — offering the lowest prices in the secondary market.
