A business line of credit is an important business financing option that allows business owners the ability to access a source of capital when they need it most. This type of business finance provides businesses with flexibility and stability, allowing them to purchase what they need immediately, while still preserving their cash on hand. A business line of credit makes funds available up front and business owners only pay interest as they draw on the funds — as opposed to full repayment, which is typically required with installment loans. Business lines of credit can also be set up for convenient access so business owners can quickly adjust their cash flow and meet their customers’ needs.
How Do Lines Of Credit Work?
Loans and lines of credit are the two most common financial products for which people apply. When you take out a loan, you get the whole amount at once, and the interest accrues from the very first day.
A line of credit, on the other hand, allows you to borrow a certain sum of money whenever you need it. However, no interest is due until the loan is taken out.
Lines of credit for businesses are typically unsecured, meaning you won’t need to put up any collateral to get one. Secured lines of credit are secured by collateral, such as your home or a savings account.
If you’re applying for a credit line, a higher credit score will increase your chances of getting a reduced APR. The Annual Percentage Rate (APR) is the cost you pay each year to borrow money, including fees, expressed as a percentage. There may be yearly fees and borrowing limits attached to certain lines of credit.
Once you’ve been approved for the line of credit, you’ll have a certain amount of time (the “draw period”) in which you may withdraw funds. The draw period may take a long time. When you’re ready to borrow the money, the bank may provide you with special checks or a card to use, or it may just deposit the funds into your checking account.
The interest on your line of credit will begin to accumulate as soon as you draw money from it, and you’ll have to start making payments right away, with the amount of each payment being reapplied to your available line of credit. If you still owe money after the draw period expires, you’ll have until a certain date to pay it off. Keep in mind that if you merely make the minimal payments, you might end up paying more in interest.
Revolving vs. Non-Revolving Lines of Credit
A line of credit (LOC) is a sort of revolving account, often known as an open-ended credit account. Borrowers may spend the money, return it, and spend it again in a seemingly never-ending, revolving loop under this arrangement. LOCs and credit cards are revolving accounts, as opposed to installment loans like mortgages and vehicle loans.
Consumers who take out installment loans borrow a specific amount of money and repay it in equal monthly installments until the loan is paid off. Consumers who have paid off an installment loan cannot spend the money again unless they qualify for a new loan.
Non-revolving credit has the same characteristics as revolving credit (or a revolving LOC). A credit limit is set, money may be used for a variety of activities, interest is levied as usual, and payments can be made at any time. There is one significant exception: the available credit pool does not refill once payments are made. When you fully repay the LOC, the account is closed and cannot be used again.
Business Lines Of Credit vs. Business Credit Cards
Though credit cards for businesses officially fall under the category of lines of credit, there are many key areas in which they vary from more conventional lines of credit.
When you take money out of a company line of credit, the money goes straight into your bank account, the interest is paid on it, and you may use it anyway you choose. A cash advance on a business credit card can cost you more money and come with a higher annual percentage rate.
Unlike conventional lines of credit, however, business credit cards often come with spending incentives like points or cash back. In most companies, rewards are allotted to cover overhead costs like paper, petrol, internet, and cable. They could also advertise introductory periods of 0% interest, during which your card balance will accrue no interest at all.
If you have a modest, consistent business spend each month, a credit card may be a good option, while a business line of credit may be better suited to the bigger, more stable expenses that come with expanding your company.
How To Get A Business Line Of Credit
The first step in securing a business line of credit is calculating how much money you need and how soon you need it. The next step is to figure out what kinds of credit lines your company can get by looking at things like how long it’s been in operation, how much money it makes each year, and your own personal credit score.
When you know what kind of finance you need and whether or not you qualify for it, you may shop around for the best deal. You may apply for a business line of credit via a traditional bank or credit union, an internet lender, or through a marketplace that allows you to submit one application and get competitive quotes from many lenders.
Lender-specific factors such as interest rates, loan amounts, and eligibility requirements are common.
Lenders will look at your credit and financial history while evaluating your application, so be prepared to show them things like:
- Personal and business tax returns
- Personal and business bank statements
- Business financial statements (e.g., profit and loss statement or a balance sheet)
It’s possible that a personal guarantee or collateralized item may be requested from you as well.
The application, underwriting, and finance procedures may take anywhere from 24 hours to several weeks to complete.
When Is A Business Line Of Credit A Good Idea?
If you need money quickly to pay for things like inventory restocking or unforeseen bills, a business line of credit may be a suitable choice. In contrast, a small company term loan is ideal for financing one-off expenditures like financing an expensive piece of machinery.
Many of the advantages of a business line of credit, such as the ability to develop business credit and get revolving funding, may be attained via the use of a business credit card. A business credit card for low credit might be a great help if you have a limited credit history or no credit history at all.
When deciding which business line of credit is the right fit for you and your business, there are many factors to consider. Factors such as purpose, business size, financial condition, credit thresholds and more must be taken into account to determine which business financing option best suits your business needs. It is important to select a business line of credit that fits your business model, provides a way to cover any future unforeseen expenses, and allows for continued growth in the future. Taking all these obligations into account will ensure you receive the business financing you need as you continue to build and grow your company.
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