A business line of credit allows you to draw against a predetermined credit limit, as you require it, rather than getting the total loan amount all at once just like a term loan. The major benefits of a credit line are that you only need to pay interest on the funds you actually draw.
How Line of Credit Works?
A line of credit is a revolving line that you can draw against, when you need it. It is generally used for short-term working capital to help improve overall cash flow of your small business, or to finance the costs of unexpected expenses. Lines of credit are similar to a credit card where the line is open and available to use, and you only pay interest on the part of the line you draw. It is an exquisite way to access to cash, which can be invest into your business when needed.
As you pay down the balance on your line of credit, you are increasing the amount available to draw in the future. As soon as a credit line is set up, drawing finances from it is also the fastest way for your business to get access to capital for quick and short payment or surprising events.
Line of Credit vs Loan
A term loan is an amount that you pay interest on until the entire amount is paid. Term loans are used for some specific objectives such as looking to fund a big piece of equipment. These loans are commonly the best option if you immediately want to use the entire amount that you approved for to fund an outsized purchase or other expense.
Term loans also require you to reapply whenever you need cash. This indicates going through underwriting, paying origination fees, and paying closing costs every single time you need more cash. If you have a continuous financing requirement, then a business line of credit will be reasonable funding solution for you.
A line of credit will come up with more flexibility and save cash if you are not going to use your full line. Additionally, an open line of credit account can be an excellent way to build your business credit until you need it. For short-term funding requirements, line of credit is the best solution.
Why Lines of Credit Is A Preferred Funding Option?
Considering that a line of credit can be an inexpensive and convenient source of funding, they have become very common tools for small business owners. Actually, almost half of all small business owners currently have a line of credit.
Almost 47% of small businesses do have a small business line of credit and 28% of small businesses are depending on borrowed funds on a regular basis. This might be considerably misjudging the point to which small businesses prefer short-term borrowing.
For instance, almost 60% of small businesses are depending on trade credit. By having these figures in mind, it becomes clear how important a line of credit might be to regular operations of small businesses.
Where to Get a Small Business Line of Credit?
A line of credit can be acquired from both traditional and alternative lenders. When looking for the right lender for your small business, it is essential to understand what your objectives are for having the line of credit.
How to Determine How Much Line Of Credit You Need?
Credit lines typically have smaller borrowing limits than term loans, which make them ideal for unexpected charges but not for large capital investments. If you are looking out for more than $100K in funding then you will need to consider a conventional lending and, if you are looking for a line of credit less than 100k, then alternative lenders are the best funding sources. Alternative lending is quicker than traditional lending, if you need immediate funding, then alternative funding is the option you opt for.