Everything you need to know about a business line of credit
If you are a business owner or even just interested in starting your own company, then you have probably heard of a business line of credit. If you have not, that is fine as well. You will read all about it right now. For starters, a business line of credit is a funding option that has its pros and cons, which you need to consider if you need funding for your business.
How does a line of credit work?
A business line of credit is very similar to a business credit card. You get access to a sum of money that you can borrow at any time, and you only pay interest on the amount that you have borrowed. Once you pay back the money with interest, you can use it again in the future. Business lines of credit are different from commercial business loans, where you get the whole amount of money at once, and you have to pay it back through monthly payments.
A business line of credit, like most other loans, can be secured and unsecured. If it is unsecured, you don’t need collateral, but you will most probably have to pay higher interest rates. If you take out a secured business line of credit, you will have to put up collateral, but in the end, you will get much more favorable interest rates.
What are the requirements?
Before applying for a business line of credit, keep in mind that there are a few requirements that you need to fulfill. First and foremost, you have to have a good credit score of 600 and above.
Secondly, you need a good cash flow which is directly connected to the third requirement – an older business that has been profitable for quite some time. That being said, these requirements depend on the lender you choose to work with.
Banks are usually stricter when it comes to a business line of credit, but they offer the most favorable interest rates. Online lenders, on the other hand, have higher interest rates, but they also have more lenient standards.
Advantages and Risks
A business line of credit comes with advantages but also risks. In this section, we will take a look at both.
Advantages
1. Helps with your cash flow.
Smaller and up–and–coming businesses tend to be late for their regular payments. The reason behind this is that in the first few months when starting a business, you usually invest more money than you get back. Older businesses can also have this kind of problem if sales unexpectedly drop more than usual. In cases like these, a business line of credit is a good option. You will have access to cash in instances where you do not have cash inflows from customers. With a line of credit, you will be prepared to deal with costs even when business is slow.
2. You only pay interest on the amount you use.
Compared to other types of loans where you have to pay interest on the whole amount, here you can use and pay interest only on the amount you need. This can help you control the debt of your company and avoid some usual borrowing costs.
3. You are building a relationship with your lender.
Negotiating the terms of the loan and cooperating with one lender can help you with your financing options in the future. Carefully using your business line of credit can also increase your credit score, which is always a positive.
Risks
1. It can get expensive.
Business lines of credit usually have higher interest rates than other types of loans. They can also carry some hidden fees and unpredicted costs.
2. It can be difficult to obtain.
The application process for a business line of credit can take a lot of time, even for the most patient of business owners.
3. The borrowing limit is pretty low.
The amount you can borrow with a business line of credit is relatively small. It can be used to cover operating expenses, unexpected costs, and so on. You can’t use it for equipment financing or other significant expenditures.
Conclusion
In this article, we have covered the most important information when it comes to a business line of credit. The only thing left is for you to decide whether this is the right funding option for your business or whether you need to browse through other alternatives.