BitX Funding Guide For Business Lines of Credit
Every small business faces periods of lumpy cash flow. Often, this uncertainty comes on the heels of an unforeseen cost. These expenses could be a whole host of unique reasons — a new large order with high material cost or a broken machine that has production at a standstill.
Any of these can drain your bank account (and then some). It also hinders your growth. It’s tough for any company to turn away customers due to lack of working capital.
Savvy business owners understand that the best-laid plans (or budgets) can fall by the wayside quickly. To stay ahead of the curve, businesses have relied on lines of credit as the fast and convenient option to access funds. Historically, business lines of credit were limited to those who could afford to wait out the long, arduous underwriting practices of institutional lenders.
A line of credit is financing designed to get you access to the funds your business needs up to a certain limit. This financing tool allows you to draw up to your limit and pay off the balance on a continuous basis. The key feature of this product is flexibility: to draw anytime, to use for any business purpose, and to reuse next time.
A business line of credit (or “LOC”) is a revolving loan that gives business owners access to a fixed amount of money, which they can use day-to-day according to their need for cash.
LOCs are specifically designed to help businesses finance short-term working capital needs, such as:
Purchasing inventory or repairing equipment
Financing marketing campaigns
There are two main types of business LOCs:
With this type of LOC, a business must pledge assets as collateral to secure the loan. Since a Line of Credit is a short-term liability, lenders will typically ask for short-term assets, such as accounts receivable and inventory. Lenders typically won’t require capital assets, such as real property or equipment, to secure a LOC. If the borrower is unable to repay the loan, the lender will assume the ownership of any collateral and liquidate them to pay off the balance.
This type of LOC does not require assets as collateral (meaning it’s sometimes a more attractive option to business owners). Still, the lack of collateral means a higher risk to lenders, so to get an unsecured LOC you’ll need stronger credit and a positive business track record. In addition, the interest rates are often slightly higher. Unsecured lines are usually smaller.
How does the line of credit work?
The credit line assigned acts as a rainy-day fund for your business needs.
Here’s an example:
Martha’s Gift Baskets receives a $20,000 corporate order, for which material costs are $10,000. Martha thought she’d saved to take on such an order, but she realizes there will be a $5,000 shortfall. Luckily for Martha, she has a $20,000 business line of credit from which she can draw that amount. She pays interest on the amount she withdrew. Once the order is fulfilled and paid, she can choose to continue the installments or pay back the remainder in one go. The $20,000 replenishes and is available for next time.
When you open a line of credit, you’ll receive access to a stated amount of funds to use as needed. You then receive a monthly invoice reflecting the amount of credit you’ve used, along with any interest charges.
Your payment is based on the actual interest accrued on these funds while you use them. Once the funds are repaid, that amount is available when you need it. You’re only charged interest on the amount of the loan you actually use.
LOC rates and limits are set by lenders and based on your risk grade, your collateral, and any servicing requirements. Your risk grade is judged on factors like the financial success of your business, the state of your business sector in general, your business and personal credit scores, and whether or not you have collateral.
Most lenders will charge an annual fee for the LOC, in addition to interest charges. If you’re going to need a significant number of loan advances and repayments, transaction fees might apply.
Smaller LOCs (under $100,000) can operate like a credit card account, with advances made by using a credit card or writing checks issued for the account. Accessing the funds can also be deposited directly into the borrower’s account via an ACH deposit.
Why a Business Line of Credit Makes Sense?
Online lenders can review and approve applications within 24 hours. That can mean cash in your bank account as fast as same day.
The line of credit is assigned to the business for business use, with no other strings attached. Other loan types have limitations such as the funds can only be used for certain equipment or are secured by certain assets.
Having quick and easy access to funds can be a game changer for any small business. A business line of credit is perfect for businesses with seasonal sales cycles and monthly cash flow fluctuations. It’s also ideal for businesses that typically have unpredictable, or “lumpy,” cash flow, or need to invest in their business in order to grow.
If your business regularly requires funds to cover short-term cash flow issues, manage your business’ day-to-day needs, or take advantage of immediate business opportunities, then applying for a LOC makes sense.
Here are a few examples of situations in which it’s smart to get a LOC:
Example 1: A seasonal business that generates most of its sales in the summer could use a LOC in the off-season to help cover overhead or meet payroll. The LOC would allow them to maintain normal business activities even as their income fluctuates.
Example 2: A business could use a LOC to finance a marketing campaign, which would attract new customers and expand sales. The new debt will be paid off quickly because the campaign will generate additional revenue and grow the business faster.
Example 3: If your business needs to cover expenses while waiting for clients to make payments on sales you’ve made with terms, then a LOC could be useful for cash management.
What You Should Know Before Opening a Line of Credit:
Before opening a business LOC, make sure you understand your lender’s qualifications, loan conditions, interest rates, and fees.
There may be charges for account set-up, transactions, and annual fees. For example, a bank may charge an opening fee of $150 (maybe more depending upon the credit amount) with no annual fee for the first 12 months, but then an annual fee beginning in the second year.
In order to reduce risk, some lenders require that businesses pay down their outstanding LOC balance to $0 at some point during the year, often for at least 30 days. This assures a lender that the borrower is generating sufficient cash flow to operate independent of the lender’s funds, and not relying on the LOC as a substitute for owner’s capital.
Due to the unpredictable nature of the market, the lender always reserves the right to call a LOC payable immediately. This means your full balance would have to be paid, and your LOC reduced to zero without warning. If your business depends on the line of credit, this can be a critical issue, so the business should always be prepared to either replace the LOC or scale back in order to weather the loss of credit.
To Sum Up:
Business lines of credit help small businesses grow revenues and expand profits. They offer financial flexibility to cover gaps in the normal business cash cycles. They can be used to harness the necessary resources to maintain activity year-round and can fund expenses to develop your vision, build your organization, and amplify success. So look ahead and apply before your next busy season – it’s best to have the cushion before you really need it.
|Start Up Line of Credit||Short Term Loans||Long Term Loans||Business Lines of Credit|
|BitX Funding start-up financing program connects entrepreneurs and business owners with $25,000 – $150,000+ in unsecured business lines of credit. This program can provide you with funding in as little as 10 days and is typically offered with 0% interest financing for the first 6-18 months.||Designed to help meet short-term needs, such as unexpected events, or to take advantage of a great deal. Typically, most small business owners qualify.||BitX Funding offers true long-term business loans with automatic monthly payments. If you are looking to Fund larger projects that pay back over a longer term with rates as low as 5.49% this option may be right for you?||Business lines of credit allow you to draw funds whenever you need. Funds will be deposited directly into your bank account. Repay via automated weekly debits over six months. Your available balance replenishes as payments clear. Lines of credit can go as high as $100,000 with interest rates averaging around 13%.|
BitX Funding is the online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and we are passionate about helping your company reach its full potential.
You can reach a loan specialist by toll-free at 1-800-824-2407, or email at firstname.lastname@example.org or applying online here and we can guide you on which loan is the best fit for your business.