Business owners know that they need all the support they can get, especially regarding their financial needs. Just like everyone else, business entrepreneurs need to pay their bills, pay for equipment or inventory, pay employees’ salaries, and more.
For business owners who need that extra bit of cash, a business credit line or line of credit has become a more popular kind of loan for growth and expansion, unplanned expenditures or emergencies, and so on. Unlike other types of loans, which can be more difficult to apply for and attain, business lines of credit can be easier and faster to get. But before you apply for such a loan, it still pays to know as much as possible about it and how it can benefit you. Here is everything you need to know about business credit lines and how they can help your business.
The Essentials of Credit Lines
The most basic fact you need to understand about a business line of credit is that it is quite similar to a credit card for your business. Unlike standard or traditional short-term or term loans, a business credit line does not give you a lump amount of cash you would have to pay back monthly on a set schedule. A line of credit will instead provide you with access to cash or capital of a specific amount, which you can withdraw whenever you need it or whenever it’s necessary.
With a line of credit like this, the balance will be a revolving balance, which means that you can carry over the balance every month, and the interest on the credit line will be calculated depending on the cash you withdraw. Once you repay that amount, referred to as the principal, the credit available on your line will return to the set limit. You can then use the line again as necessary.
The main difference between a standard loan and a business credit line is that the terms are more flexible with a line of credit. You can decide how much to borrow and when and only need to pay your interest on the amount you borrow. The fees for credit lines will also vary based on the lender and the credit line you opt for. The only restriction is that there is a set limit to your credit line, and you can’t go above that limit.
The Two Types of Business Credit Lines
You should also know that there are two essential types of business credit lines: the secured line of credit and the unsecured line of credit.
Secured Line of Credit
The secured credit line is a credit line where the lender will ask you, as the borrower, to present some form of collateral (such as assets) against the credit line. The good thing is that if you don’t have collateral, some lenders may be able to accept invoice accounts receivables or inventory instead.
Most lenders won’t necessarily ask for a big asset such as real estate or equipment, although there is still collateral. This is just a way for lenders to secure their investment.
Unsecured Line of Credit
But with an unsecured business line of credit, the lender will not ask you for any collateral. This is obviously a more popular form of credit line for many business owners since no collateral is involved. However, the lender takes on more risk, so you would need to go through a more stringent process before becoming approved.
For instance, in order to be approved, you may need to present a good rating for personal credit or business credit, and you may also have to present evidence of steady revenue for your business. Unsecured lines of credit often have lower credit limits than secured ones, and the interest rates may be a bit higher.
How it Can Benefit You
Flexible Terms of Payment
As mentioned, the main difference between a credit line and other options for funding is that it is more flexible – and this refers to the terms of payment as well. You only need to pay for what you have borrowed, and it’s up to you to keep up the revolving line of credit so you can borrow again whenever necessary. It’s like a credit card in that you can simply pay the minimum due if your finances or earnings for a particular month are low.
A Better Way to Keep Track of Business Expenditures
With a line of credit, you are also provided with a better way to keep track of your expenditures as a business. Keeping your personal and business finances separate is easier since a business credit line is wholly for your business and not for personal use. Every month, you can also easily see your expenses to understand better where your money goes.
A Smoother Running of Your Business Operations
Business credit lines are also useful for other purposes – they allow you to run your business more smoothly. How so? Since you have a line of credit – cash that is basically available to you at any time – you can deal with emergencies when they come, such as unexpected expenses, the need to purchase more supplies, and so on. You will be better at dealing with your business’s short-term needs, which will help you run your business’s daily operations without any distractions or disturbances.
As a business owner, you may already know how important it is to establish a good rating with credit companies and agencies. By using a business credit line and ensuring you pay what you borrow on time, you are building a positive history for your business regarding payments and credit. If you ever need a term loan in the future, a good credit rating or report can certainly be a big help.
More Options for Use
You will be presented with a lump sum when you get a standard loan. You may already have a purpose for this lump sum: to expand, pay salaries, buy stock, etc. But once the loan money runs out and it turns out that you need to have repairs on your business premises, for example, then where can you get the cash you need? This is where credit lines are inherently beneficial because they allow more options for use. You can turn to your line of credit as expenses and unexpected circumstances arise without worrying about the loan’s approval or how long it will take. The cash is immediate, and the problem is solved as it arises.