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4 Things You Need to Know About Small Business Lines of Credit

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4 Things You Need to Know About Small Business Lines of Credit

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Many businesses survive hard times with the help of loans; the lending institutions provide different loan options for small business owners, so are you looking for additional working capital for your company?

Or do you feel other types of small business loans are limited and rigid? If the answer is yes, then you should compare options and consider a business line of credit (LOC) instead.

A business line of credit is similar to using a business credit card, it is flexible, and you can borrow up to a pre-set limit. Business line credit also offers revolving credit; which encourages a good lending habit. Once you pay up your credit in due time, a new limit would be set. The best part of LOC is that interest is attached only to borrowed money.

However, there is a salient difference between credit cards and LOC;

First; LOC offers reduced interest rates and it is dynamic compared to credit cards.

Second; LOC has more payment options, and payroll is an example.

Here's how LOC works; if your line of credit has a limit of $10,000 and you withdraw $3000 from it, you'll be paying interest for the amount withdrawn only (just the $3,000). The remaining $7000 is still available In case you need to make another withdrawal. When you've serviced your $3,000 loan (including interest), you'll once again have a credit limit of $10,000.

LOC is impressive, right?

Well, before you get a business line of credit, do some research and be sure it is the right decision for your business. Here are some tips that will help you know if LOC is right for your company;

1. Your Need

You'll have to consider the amount your company needs because the borrowing limit of line of credit is not much compared to what other credit options offer, especially if you have little or no collateral backing.

However, if you are looking to solve a short term cash flow need, then LOC can come in handy. Line of credit is incapable of funding big projects like setting up a new branch or buying heavy equipment.

If you need a loan that you'll pay over a long period, then LOC should not be an option.

2. Your Credit History

Credit history is an issue for lenders, but with a line of credit, you'll still get financed even if you have a bad credit history, or if your business is new. With bad credit history, getting LOC from banks is almost impossible. Nevertheless, there are other options like online platforms that may not request for your credit score, most online platforms also welcome new businesses.

If you maintain a good LOC history, you'll be able to access higher loan amounts. Good LOC history will also give you access to better interest rates and more suitable repayment terms.

3. How Soon Do You Need The Loan?

If you want to process a loan from a bank, you'll have to go through a lot of processes, especially the paperwork, it can be stressful, and if you are not patient enough, you might give up.

What if your company is in urgent need of money?

This is where LOC has an edge over traditional business loans. It will only take a few days to get a business line of credit from online lenders. If you already have an existing line of credit, you'll have instant access to money as long as you are not spending above your limit.

4. Spending Liberty

If your company need more freedom on how it wants to send it's a loan, the LOC is a great option. Most small business loans have a limitation on how the investment would be spent. For example, if you get a loan from DBA CDC/504, it can't be used for working capital, it's only limited to buying machinery and renovating facilities. But with LOC, you can finance any business project.

You don't have to worry about paying interest for the entire loan amount (limit). You'll only worry about the money you use. With this, you can have LOC without having immediate need; it can serve as back up when there is an emergency expense. You won't be paying for interest even when your fund is lying idle.

Final thoughts

Business line of credit have over time proven to be a go-to solution for companies; it helps businesses in need of additional capital. However, terms vary between lenders, don't just make assumptions, make sure you go through the terms of service of the LOC lender you are about patronizing. And remember you LOC cannot finance massive projects.

Thanks for reading.

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