A Business line of credit helps entrepreneurs maintain a constant supply of cash to keep up with recurring expenses and the ebb and flow of seasonal changes in the business. For the 50% of businesses owner who has experienced cash flow problems, a line of credit is a necessary lifeline. You may think: “My business is profitable; we don’t need additional cash reserves.” But many businesses with and without cash flow issues keep a line of credit handy for unexpected growth or expansion opportunities. A business line of credit is a flexible, often low-cost way to cover short-term financing needs, regardless of the nature of those needs.
How does a line of credit work?
A business line of credit, or revolving line of credit, is a flexible loan option for businesses. Lenders allocate maximum capital on certain factors, such as current cash flow and business credit rating. Unlike a business loan, where a business must make regular daily, weekly, or monthly payments to repay the loan, the borrower has to repay the line of credit only when the business draws from the line.
You will pay interest only when you pull money from the line. The business then decides when, if, and how to use that capital. You will have a specified repayment period, but, like a credit card, there is no penalty for paying early. Although you pay interest only once you use the line, there may be a monthly maintenance fee for letting your line of credit sit unused. For any line of credit, you consider you need to carefully read the terms of the bank’s offer or lender to make sure you understand any associated fees.
Check out this link for the beginner’s guide to an unsecured business line of credit.
What is a secured vs. unsecured line of credit?
A secured line of credit is a line in which the borrower puts up collateral as a security deposit on the line of credit. Putting up property as collateral is common, but this could also be other items businesses own. Such as equipment or inventory. Lenders prefer Secured lines over unsecured lines. The lender is taking on less risk, so they usually grant a higher credit maximum at a lower rate for secured lines.
New businesses or businesses with poor credit might only qualify for a secured line of credit because of the inherently higher risk. In contrast to a secured line, an unsecured business line of credit does not require collateral assets. Unsecured lines of credit are more expensive because the lender assumes a higher risk. Credit cards are a type of unsecured line of credit. Businesses with years under their belts and stellar business credit reports are more likely to qualify for unsecured business credit lines at reasonable rates.
What is a line of credit used for?
If you want to fund a one-time or long-term project, a mid-term business loan might be better than a line of credit. Here are a few ways you might use a business line of credit:
- Your business has seasonal fluctuations — perhaps your sales will dip in the summer.
- A line of credit will help during periods of low sales.
- Your clients take 30 days or longer to pay you for your products or services. You might need a line of credit to cover the interim time.
- You land a large client and need credit to cover the cost of materials while you ramp up work for the client. A business line of credit can cover expenses during production.
- You can receive a discount if you pay a bill early; if the resulting discount is significant, you can cover the bill with your line of credit while you wait for cash flow to catch up.
What are the requirements to qualify for a line of credit?
A lender will look at your time in business, your credit score, annual revenue, and the strength of your cash flow, and may even look at your business credit to qualify you for a line of credit. If you don’t yet have a bank account set up for your business, and if you are not yet building business credit.
An additional factor that a lender will look at is your ability to secure the line. Again, a secured line is a less expensive option, so a lender will approve your application if you can put up collateral for the line of credit. Like many financing options, the best time to get a line of credit for your business is well before you require it. You’re more likely to qualify for the best terms when your business is in great shape and has no cash flow problems. Remember: you will pay interest on the amount that you borrow. If you secure a line of credit now, you’re not obliged to use it, but it will be there when you run into tight cash flow situations.
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 are passionate about helping your company reach its full potential.
You can reach a loan specialist toll-free at 1-800-824-2407 or email [email protected] or apply online here, and we can guide you on which loan is the best fit for your business.