In the normal operations of your small business, there will most likely be times when your business needs to have quick access to funds. Unless your business is already hugely successful and the bank accounts are overflowing, there will be times when the funds you need just aren’t available in your checking account.
What do you do when you need money for your business fast?
You could take out a loan, but that would probably take too long to help with your current urgent needs. Besides, it’s estimated 40 percent of small business loan applications are denied, leaving the applicant strapped without any of the much-needed capital.
What Is a Business Line of Credit?
The solution in this situation would be a business line of credit, also known as revolving credit. It allows small businesses to have immediate access to the much-needed capital to manage or expand operations. When a situation arises, whether it be a problem that needs to be fixed or an incredible opportunity that needs immediate capital, a line of credit is a cheap and fast way to access capital.
How Does a Line of Credit Work?
A business line of credit is much like a personal line of credit or a business credit card. Your business can immediately access unsecured funds up to a certain amount ($50,000, for example), so you won’t have to provide collateral in order to receive those funds. If you need more than that amount, you will have to secure the funds with assets from the business or your own personal assets. It’s also a cheaper way to obtain a cash advance.
If you are approved for a business line of credit, you and the lender will determine how much money will be available to your business and what the rates are for the amount you borrow. If you don’t use any of the money, you aren’t charged anything. You have access to the money anytime you want, and you can pay back as much as you want. So when business is good, you can pay back more, and when business is lean, you can repay less at the time. Also, after you make a payment on what you did borrow, you have immediate access to what you just paid back!
Is there a timeframe for a line of credit repayment?
No. You’ll just have to keep making your payments on time. Similar to a credit card, you can repay a minimum amount, or you can pay that minimum in addition to whatever you can afford to pay down the line of credit. A business line of credit is extremely flexible allowing you to use the funds, pay the line of credit down, reuse the funds, and repay in the amounts you’re comfortable with. This sort of flexibility increases control over your business’s finances and allows you to make instant decisions to benefit your business.
Why not just get a loan?
A small business loan is a good way to build credit and raise your credit score by making timely payments and keeping a low balance. Very often, a loan is exactly what a business needs, especially if it’s a larger sum of money. A business loan offers a lump sum of money, and payments must be made on that money regardless if any of it was used or not. Payments will be required at a fixed or variable interest rate over a specific timeframe. With a line of credit, you don’t make any payments if you haven’t used any money or have already paid it all back.
Some loans require that the funds be spent for a specific purpose, but funds from a line of credit can be spent in any way the business owner feels is best for the business. It allows complete flexibility and control, and it is not constrained by any specific timeline. Another benefit of using a line of credit is that after making consistent payments on money borrowed, a company can show that they are responsible and will pay down a line of credit. This would look favorable to other lenders in the future.
What are the rates for a business line of credit?
A line of credit has been compared to a credit card, except a line of credit has a much lower interest rate. And for being an unsecured line of credit, it has a lower rate than most other unsecured type loans.
Final Thoughts
A line of credit is a versatile way of obtaining funds quickly, right when they’re needed. Most other types of loans are much slower, and simply aren’t adequate to satisfy a business’s immediate needs like a business line of credit would. It allows complete control, and flexible, instant funds that can’t be found in other types of credit or loans.
Want to see if a line of credit is right for your business? Contact a loan specialist today. We’re ready to help!