Keeping your finances running smoothly can often be challenging for a small business in today’s fast-paced world. A business line of credit can be a useful tool for providing much-needed financing liquidity and stability.
With a business line of credit, you can borrow up to a certain limit and pay interest only on the portion of the money that you borrow.
Credit lines as revolving loans can be a simple solution for your business growth at a pace that’s right for you.
A business line of credit is useful for bridging short term cash flow gaps or buying inventory or covering unexpected emergencies, but also for expanding your business.
You may find it useful to apply for a business line of credit even before you need it so that if the need arises, you have quick access to cash. In some cases, first-time applicants can get better interest rates, so make sure to check that. For other types of business growth loans or alternative start-up funding options, feel free to check our website.
Business Line Of Credit vs Term Loan vs Business Credit Card
A business line of credit gives immediate access to funds, up to a pre-established credit limit, providing you with the flexibility that regular term loans don’t.
As opposed to a business line of credit, a term loan provides a lump sum of cash upfront, which is repaid over a fixed period of time.
Also, unlike a typical term loan, business line of credit is not designated for a specific purpose or purchase.
A line of credit is similar in its nature to business credit cards. You draw and repay funds up to a maximum amount – your credit limit and you pay interest only on money that you borrowed.
But unlike a credit card, the line can incur interest as soon as you use any portion of the funds. The interest rate is, however, usually lower for a credit line than a credit card.
Things to consider
Things to consider when assessing whether to open a business line of credit and with which lender are:
- Credit limit
- Total charges: In addition to interest, some lenders may charge additional fees like origination or maintenance fees. All these charges are reflected in the APR.
- Interest rates: They will depend on your credit history, features of the loan, characteristics of your business, but on interest rates in the broader economy as well. Also, be aware that the interest rate on a line of credit is typically variable, which means that interest may vary over time.
- Speed to funding: How quickly you need the funds and how quickly the lender will grant you access to the initial and ongoing funds.
- Minimum qualifications: The lender will typically look at your credit history and score, time in business, annual revenues, liquidity, and cash flow coverage when evaluating your application. Online business lenders tend to have lower requirements and shorter procedures than traditional lenders, but note that this will result in higher rates and lower credit limits, too.
- Repayment terms and schedule: This means how long you will have time to repay your loan.
- Collateral or guarantee requirements: Business lines of credit with lower credit limits are typically unsecured, which means collateral such as real estate or inventory is not required.
- Annual review and renewal
- Improved cash flow flexibility: Credit lines are revolving loans, so you have the flexibility to repay your debt and borrow more in the future if the need arises.
- Zero or small interest paid if the loan is repaid quickly. By opting for a line of credit instead of a term loan, a business will be in a position to reduce interest rate payments by incurring interest only on the amount drawn from their line of credit. Additionally, businesses that are able to repay their loans quickly will save money with a business line of credit compared to a traditional business term loan.
- Credit lines are helpful with unexpected expenses and emergencies, if and when they occur.
- Multiple lending providers to choose from.
- Helps you build credit profile and thus position you for better loan terms in the future.
- High interest rates on the balance
- Risk of lender reducing or eliminating credit line as they often reserve the right to reduce your credit limit. This can put your cash flow in vulnerable position.
- Smaller financing amounts and higher rates compared to business loans