Small business lines of credit allow you to draw against a predetermined credit limit, as you need it, rather than getting the overall loan amount at one time like a term loan. The largest benefit of a business line of credit is that you only pay interest on the amount you draw.
How Line of Credit Works
A line of credit is a revolving line that you can draw as you need it. It’s usually used for short-term working capital to help improve cash flow, or to finance the cost of unexpected expenses. These credit lines are similar to a credit card in which the line is open and available to you, and you have to pay interest at the part of the line you draw. It’s an outstanding way to get access to cash which can be placed into your business quickly.
Unlike a term business loan, as you pay down the balance to your small business lines of credit you increase the amount available to draw in the future. Once a credit line is established, drawing funds from it is the quickest way for your small business to get quick access to capital for quick payments.
Line of Credit vs Loan
A term loan is a money you pay interest on until the entire amount is paid back, and they’re usually fully amortized. Term business loans are typically used for a particular objective, such as to fund a large piece of equipment. They are the best option if you need cash immediately.
Business term loans additionally require you to reapply every time you need to get financed. This indicates going thru underwriting, paying origination fees, and paying closing costs every time you need more money. In case you have a constant financing requirement, then a business line of credit will be a great funding program for you.
Small business lines of credit will give you more flexibility and save you money if you’re not going to immediately use your full line. Additionally an open line of credit account can be a terrific way in order to build your business credit until you need it. Line of credit products are normally the best solution for short term business requirements.
Why Lines of Credit are Preferred?
Due to lines of credit easy affordability and convenience, they have become very preferred program for small business owners. Actually, almost half of all small business owners in US have business line of credit. In US, 47% of small businesses not only have lines of credit, but 28% of small business are counting on it constantly. And this might be underestimating the point to which small businesses depend on short-term borrowing. For instance, 60% of small businesses depend on trade credit. With these figures in mind, it becomes clear how essential a business line of credit might be to regular small business operations.
Where to Acquire a Line of Credit?
A line of credit can be acquired from traditional lenders, or you can get funded thru online lenders. When trying to find the appropriate lender for your small business, it’s important to know what your objectives are for getting the line of credit.
How to Determine the Amount of LOC?
Small business lines of credit normally have smaller borrowing limits as compared to term loans, which make them best for unexpected expenses; however not for larger capital investments. In case you are looking for more than $100K in investment then you will need to go to traditional banks. Amounts less than $100K makes you a perfect candidate for an online lender.
Where to Use a Line of Credit?
Preferably, small business lines of credit are used in the same way that family credit cards are used, to cover unexpected costs or in case of an emergency. They’re not intended to be used to make big capital purchases such as real estate or large equipment, or as a way to come up with the cash for daily expenses.