More often than not, a need for the business owner arises when they have to generate funds to support financing for the desired operations. The operations could either be expenses like increasing the supplies, handing out payroll, or it could also be for something like filling up the inventory.
In cases like these, it would not be a good idea to choose a small business loan. Instead, a business line of credit would be a better option. But what exactly is a business line of credit?
What is a Business Line of Credit?
While at first glance, a business line of credit might sound similar to a small business loan. However, it is more similar to a small business credit card. The business LOC gives you a revolving credit through which you can access a fixed amount of capital which you can use to perform your desired business operations. Unlike a small business loan, there is no lump sum of disbursement, which you need to return via instalments.
The financing company will give you a fixed amount of credit, and you can withdraw money from that every time you need it. This means that you don’t have to make repayments for the entire credit amount that has been given to you. Rather than that, you have to pay back the money that you have withdrawn from the allowed credit amount. Once you pay back the balance amount, the credit limit is open again for you to withdraw.
What’s the primary purpose of using a Business Line of Credit?
The primary purpose of using a business line of credit is to gain access to short-term funding. You don’t have to take the burden of taking a business loan and the responsibility of repaying the entire amount of it. Using a business LOC, you can set a credit limit, withdraw whatever amount you think is needed and pay that amount periodically. The repayment period could be weekly, monthly or even quarterly, as decided by the financing company.
Business LOC is an excellent choice for small businesses that are looking to manage their cash flow. So, if you need short-term funding and are sure that the money you take as credit will be gained back soon, a business line of credit would be the best option suitable for you.
Are there different types of Lines of Credit, and if yes, what are they?
There are two types of lines of credit – secured and unsecured.
In this type of business line of credit, the business owner needs to pledge some asset(s) or collateral to secure the line. However, because the line of credit is a short term liability, the assets can be short-term. Therefore, no capital assets are required in most cases. If the borrower (business owner) cannot repay the line of credit, the financing company (lender) will liquidate the collateral and pay off the balance.
While opting for this type, no assets are required to be shown as collateral. Of course, a generic lien and personal guarantee will mostly be asked for. However, the business owner needs to have a high credit profile with a positive track record of business because of the lack of collateral. On top of that, interest rates are usually higher than the secured business line of credit, and the lines of credit are also smaller.
Some handy tips you should consider while taking a business LOC
Try to clear the balance and keep the credit limit clean periodically. This will help you to withdraw funds more frequently.
It is not advisable to cover your losses by using the line of credit. This will only make you go down the rabbit hole of more repayments, and you might get into trouble.
Consider thinking more about how much funds do you exactly need and whether or not a line of credit will be the perfect solution for you.
If you have any questions regarding the Business Line of Credit or are stuck in the thought process of whether or not you should take this financing option, feel free to reach out to us. We are always here to help.