A business line of credit can be a useful source of stability when funds are needed immediately. Unlike a loan, this cash pool allows the business to set its own funding limits, repaying only what it draws from the pool with interest.
This type of funding is similar to a personal credit card, but with lower interest rates and access to cash without additional fees. Your lender will provide access to an agreed-upon amount of funds and you can draw from those funds whenever you need. Once you draw from those funds, interest begins accruing, so you’ll want to pay the funds back as timely as possible.
Often referred to as revolving credit, you borrow and pay back as needed. This makes them great for businesses that have regular cash flow shortages. If your bills need to be paid, but your customers are paying late, you can draw from that line of credit. If your available credit line is $30,000, but you only need $4,000, then you only borrow what you need instead of the entire sum. Remember, you only pay interest on what you withdraw, which in this case is $4,000. When the invoices are paid you can pay it back. A line of credit is great for short-term coverage of debts.
Some benefits of this credit are funds are readily accessible and the interest-only accumulates on the funds that are drawn. It can be used for nearly any business purpose imaginable. While good credit is not required, it can actually help build or repair credit. Also, interest rates are usually lower and closing costs are minimal compared to term loans.
While bad credit is acceptable, it will most likely result in higher interest rates. If you’re late on payments, the interest can add up quickly. Also, the business owner may be required to provide collateral as security. Collateral includes assets such as equipment, real estate and accounts receivable.
A business line of credit can be established through a traditional bank or an online lender. Online lenders tend to have a less intensive application process due to their use of technology, but they also tend to offer smaller, short-term financing. A bank can offer longer-terms and larger sums but will require more paperwork.
The better a business’s financial history and credit rating, the better the terms of a line of credit will be, including funding amount and interest rates.