In order to thrive, small businesses must be capable of adjusting to changes, particularly during periods of expansion or fluctuating cash flow. When you require immediate access to cash and a flexible repayment plan for borrowed funds, an unsecured business line of credit can often serve as an excellent solution.
When starting and expanding a business, it is crucial to have access to funds. There are various methods for investing in your business, and according to the Federal Reserve, lines of credit are highly popular among American businesses.
In fact, 43% of financing applications are specifically for lines of credit, followed by business loans and SBA loans or lines of credit. Today, we will focus on exploring the benefits of a business line of credit.
What is a business line of credit?
A business line of credit is a versatile form of funding that allows you to have continuous access to cash. It operates by a financial institution, such as a bank or online lender, approving your established business for a specific amount or limit.
When you make withdrawals, the amount is deducted from your total credit limit, indicating your remaining available credit. Furthermore, interest begins to accumulate once you withdraw funds. Let’s say you have a credit limit of $200,000, and you use $50,000 of it.
This means you still have $150,000 available as credit. A business line of credit works on a revolving basis, so once you repay the $50,000, you regain access to the full $200,000 credit limit. A business line of credit is a flexible financial tool that can be utilized multiple times, as long as you stay within your approved credit limit and maintain good standing.
It offers the advantage without restriction to a single purpose, allowing you to obtain it in advance before the actual need arises. This means that you can use it for various purposes, such as purchasing inventory at one time and covering unexpected repairs at another.
How is a line of credit different from a term loan?
A business line of credit is a form of financing where borrowers are given a set credit limit that can be used whenever needed. Unlike a term loan where the entire loan amount is given at once, a line of credit allows businesses to access funds as required. This flexibility eliminates the need for applying for new loans or refinancing in case additional capital is required.
When applying for a loan, some lenders may require you to specify a particular purpose for the funds, along with stating your intended goal and the expected advantages. However, this requirement is not always mandatory. Term loans are commonly utilized for substantial investments like purchasing equipment or implementing technology in your business.
If you’re considering getting a business line of credit, it’s important to conduct thorough research on different lending institutions. It’s crucial to examine factors such as the overall repayment amount and the convenience of repaying the loan.
How is a line of credit different from a credit card?
A business line of credit and a credit card are both types of revolving credit, but they have some differences. When you have a business line of credit, the money is transferred to your bank account.
This allows you to use the funds to write checks, pay invoices, or manage payroll for your business. A line of credit is often used for larger purchases compared to a credit card, and it comes with a maximum credit limit.
With a line of credit, you have control over how much you spend and the frequency at which you spend it. On the other hand, credit cards are associated with a physical card and allow you to make purchases up to a certain credit limit. You are required to make minimum monthly payments on your credit card.
How can I use a business line of credit?
A business line of credit offers various ways in which it can be utilized, depending on its size and the ability to repay it promptly.
Business lines of credit are a valuable resource that can be obtained in advance, even if you are uncertain about the specific expenses you may encounter. These credit lines prove to be extremely helpful when unexpected costs arise or when you require better management of your cash flow.
Let’s say you own a salon, and suddenly the pipes burst, causing a major issue. In this situation, having a business line of credit can be extremely helpful. It allows you to access cash quickly, enabling you to promptly fix the problem and avoid losing a significant amount of business.
Imagine you own a restaurant that offers catering services for large events. In the event that your customers are not paying their invoices promptly, but you still need to purchase inventory for your upcoming catering job, a business line of credit can bridge the financial gap until the invoices are settled.
Suppose you are looking for financial assistance for your business, such as a business line of credit, a small business loan, or any other form of financing. In that case, it is important to conduct thorough research, carefully examine your financial records, and seek guidance from legal or financial experts.
What types of business lines of credit are there?
When considering a business line of credit, note that there are two types available: secured and unsecured. Secured lines of credit require you to provide assets, such as equipment, as collateral.
If you fail to repay the loan, the lending institution has the right to take possession of these assets. In contrast, a small business line of credit is usually offered as an unsecured debt, meaning you don’t need to provide collateral.
How to get a business line of credit
Obtaining a secured line of credit may require more time compared to an unsecured line. It’s because your assets will need to be examined and evaluated as a means of repayment. The type of line of credit, whether secured or unsecured, can also impact the available funds and the interest rate applied.
If you want to obtain a business line of credit, it is necessary to consult your chosen financial institution to understand the specifics of a secured or unsecured line that would suit your business. You will also need to find out the necessary documentation required for the application process.
It is important to note that the criteria and repayment conditions can vary among different lenders, including both traditional lending institutions and online lenders.
Is there interest in a business line of credit?
Interest is usually associated with a business line of credit, but you will only be charged interest if you actually use the funds. The interest rates can vary depending on the lender. As the borrower, it is your responsibility to repay the borrowed amount with interest.
According to a recent article by Bankrate, the interest rates for a business line of credit can range from 8% to 60% or even higher, depending on factors such as your creditworthiness. Your creditworthiness is determined by factors such as the length of time your business has been operating, your credit scores, and other financial aspects related to your business.
The better your credit, the more likely you are to qualify for a lower interest rate and reduced fees.
Where to get a business line of credit
There are many options when it comes to acquiring a business line of credit. Here are just a few:
- Traditional banks
- To find out about the terms and interest rates for a business line of credit offered by a bank, you have the option to visit the bank in person or check their website.
- Credit unions
- A credit union functions similarly to a bank but with the key distinction of being owned and operated by its members, operating cooperatively. It operates as a nonprofit financial institution, with any profits being distributed among its members. Typically, members of a credit union belong to a common community, such as those who share the same employer. In addition to providing services like savings accounts and accepting deposits, credit unions also extend business lines of credit to their members.
- Online lenders
- When we talk about online lenders, we are referring to financial institutions that are not traditional banks. These lenders do not have physical branches where customers can visit and deposit money. They also have more limited options when it comes to the services they provide. However, despite these limitations, they are usually able to offer customers loans, lines of credit, or credit cards.
- Small Business Administration (SBA)
- The Small Business Administration (SBA) is a government agency that offers various forms of support to small businesses. They provide financial resources like investment capital, grants, bonds, disaster assistance, and loans to business owners. The SBA’s CAPLines program offers multiple choices for business lines of credit. Additionally, there are alternative lenders, such as fintech companies, that also offer lines of credit to business owners.