If you are in need of use of money \”on demand\”, you might want to think about a business line of credit. Here's some information to consider regarding this flexible funding option:
What is a business line of credit?
An outright loan is really a lump sum payment of borrowed money, but a company line of credit is a revolving line you can draw against since you need it, meaning that you only pay for the money that you employ. Lines of credit can be extended with a large traditional bank, a little local bank, or an alternative online lender.
Lines of credit have advantages over regular loans. The use of funds is flexible, there aren't any set monthly payments, with no interest rates are charged around the unused profit the account. Whenever you repay a borrowed amount, those funds are immediately available again.
Some lines of credit possess a draw period. This is an amount of time when you can withdraw funds. For example, a 2-yeardraw periodallows you to withdraw money for aperiodof 2 years.
Pro Tip: Determine how you'll use the funds and adjust your budget accordingly.
How Does a company Credit line Work?
Here's a simple example:
If you have a $10,000 line of credit and employ $5,000 for inventory, you only pay the $5,000 plus interest back. In the future, you are able to withdraw more, only as much as the $10,000 limit.
Different Types of Lines of Credit
- Traditional Secured Business Credit lines: The company owner puts up collateral, something of worth like property or equipment, with this type of credit line. The lender can claim your collateral if you default, lowering their risk and resulting in lower interest rates or more flexible payment terms than an unsecured line. You might also be eligible for a more money than you'd with an unsecured line.
- Unsecured Business Line of Credit: Collateral is not needed with this type of line of credit. There's nothing to get if you default therefore the lender is assuming a larger risk than with a secured line. The additional risk could make an unsecured line of credit harder to get and much more expensive.
- Short-Term Credit lines: A business line of credit isn't just like a term loan, but lenders consider similar information to qualify much like your credit rating, amount of time in business, and revenue. Short term credit lines could be accessed quickly and therefore are easier to be eligible for a than a longer-term line of credit. However, you have to pay for that speed and convenience with higher APRs. Be sure to read the fine print.
- Longer-Term Credit lines: This type may be more affordable but harder to be eligible for a compared to those with shorter terms. Long term lines of credit have higher amounts providing you with access to more money. The largest benefit is really a lower APR.
Pro Tip: Look at your income and income statement to determine the best fit for your immediate needs. If you can wait, attempt to improve the financial health of the business which means you be eligible for a low-cost funds.
When it is important to spread out a Type of Credit
The biggest reason to utilize a business line of credit is perfect for temporary funding needs. A line of credit may be used in a variety of ways:
- Purchasing inventory
- Buying or repairing equipment
- Financing marketing campaigns
- Making payroll
Another important benefit of a line of credit? It is a helpful tool to think about before you apply for less expensive funding as it can certainly assist you to build solid credit causing you to more appealing to lenders. Your credit score is often the first thing considered by lenders.
Pro Tip: If you don't need immediate funds, skip a credit line to check out a small company loan with low rates and long terms as an SBA loan.
What Should You Consider When Opening a Line of Credit?
Unlike financing, which is for a fixed amount for a fixed time having a prearranged repayment schedule, there's much greater flexibility with a line of credit. There are also typically fewer restrictions on the utilization of funds.
Pro Tip: Think about a credit line if you want cash fast or want to strengthen your credit profile.
Line of credit pros and cons
Pros
- You only pay interest around the funds you utilize and that the capital is available if you require it.
- You can use the proceeds for any wide selection of business purposes to help maintain your cash flow, from operating expenses to purchases to emergency cash.
- Most businesses are eligible, even if they're young or not have the highest credit ratings.
- Qualifying with this kind of funding is quicker and simpler than obtaining a small company loan. Typical loan requests are more involved, as banks wish to avoid the chance of non-payment.
- You can immediately charge purchases or access cash, and you only pay back what you've borrowed (with interest, if applicable).
- With a company charge card, with respect to the issuing bank, you may receive a sign-up bonus or earn airmiles, shopping discounts, dining discounts, or any other perks for using your company charge card. You may also earn money back on purchases. Business loans don't include these incentives.
Cons
- If you don't have a great debt-to-income ratio and a track record of at least 2 yrs running a business, you might not qualify.
- The interest rates on business credit cards are often much higher than the rates of interest on small company loans or fixed lines of credit from a bank. These rates can increase over time, and interest adds up very quickly if you don't pay your bill promptly, as well as in full, each month.
- Exceeding your borrowing limit or paying your bill late can incur fines.
- While business lines of credit might help fund immediate, short-term needs, they can become costly with time while you withdraw more capital.
How to qualify for a company type of credit
At a minimum, you will need at least six months running a business and $25,000 in annual revenue to qualify. Although some lenders don't set the absolute minimum credit rating, borrowers most likely will require a score of 500 or more to qualify.
In Conclusion
There is no universal yes-or-no answer to whether your company will benefit from dealing with a company credit line. Each business is unique, and every situation is different. A credit line can be an excellent way to access fast cash and build your credit. However, you should not depend on a credit line for long term funding. It's always smart to check with your accountant or another financial professional before you sign the contract.
