In order to stay afloat, small businesses need a continuous infusion of cash to keep up with the regular expenses and the cost of growth opportunities. However getting that continuous supply is quite difficult. Actually, 50% of small businesses have experienced cash flow issues, and 1/5 small business owners experience recurring cash flow issues.
There are quite a few approaches to deal with the inconsistent sales and costs related to running your small business, and one of the excellent options is a business line of credit. A business line of credit is a flexible, frequently low-cost way to cover short-term financing requirements which includes buying inventory and making timely payroll.
How Does A Line Of Credit Work?
A business line of credit, or revolving line of credit, is a flexible funding option for small businesses. Small businesses are allocated a specific amount of capital available through a lender based on some factors such as current cash flow and business credit score.
The small business then comes to a decision when, if, and how they would like to use that capital. Interest will be charged only when you decide to pull cash from the line. You will have a specified repayment period, but, like a credit card, there is no penalty for paying early.
However in this setting, the interest rate is only charged when you use the line, there can be a monthly maintenance charges for allowing your line of credit sit unused. Take a look with your lender to see if that is the case for any line of credit you’re considering.
What Is A Secured Vs. Unsecured Line?
A secured business line of credit is a line wherein the borrower places collateral as a security deposit on the line of credit. An unsecured business line of credit does not require any business owner to place collateral as security.
Secured business lines of credit are often preferred over unsecured lines of credit by both borrowers and lenders. The lender is taking over less risk, so they will usually provide a higher credit maximum at a lower rate for secured lines of credit. New businesses with bad credit would possibly only qualify for a secured line of credit because of the inherently higher risk.
Unsecured lines of credit are more expensive because the lender assumes higher risk. Credit cards are a type of unsecured line of credit. Businesses with many years of age with stellar business credit are more likely to meet the requirements for an unsecured line of credit at affordable rates.
Where to Use Lines Of Credit?
Business lines of credit are excellent for many situations. Here are some examples:
- Your business has seasonal fluctuations — possibly your sales take a dip within the summer season. A line of credit will help throughout low sales.
- Your customers take almost a month or even longer to pay you for products or services you provide. You may need a line of credit to cover the interim time until you’re fully paid.
- Your product requires expensive materials — you may need a line of credit to cover the expenses while you build and sell your product.
- By paying a particular bill early, you have the opportunity to get a discount — if the ensuing discount is essential, you can cover the bill with your line of credit.
- The uses of a business line of credit can extend far beyond these to touch all businesses. A business line of credit, however, is a type of short-term financing.
How to Qualify For a Line Of Credit?
A lender will take a look at your cash flow and business strength to get you approved for a business line of credit. In case you don’t have a business bank account, and not yet have business credit, it is suggested to start building it if you suspect a potential need for this sort of business financing. One more thing a lender will examine is your ability to get the line of credit. So, pre-organized before getting into this type of funding program.