Funding is always a concern for small businesses. Staffing needs, machinery, and economic downturns can put you in a bind. This article explains how to use a line of credit to keep capital flowing through your company.
What Is a Business Line of Credit?
A business line of credit is a set amount of money that a business owner can borrow against. Securing a bank loan can be tedious and stressful. With a line of credit, you can withdraw the cash you need at any time for any reason. If you run a business that operates on low cash flow, a line of credit may be the perfect solution for financing.
Who Qualifies for a Business Line of Credit?
Each lender has its own requirements for loan approval. The lending institution considers your income, credit score, and time in business. Some institutions expect you to provide collateral, but that is not always the case.
What Is the Difference Between a Line of Credit and a Credit Card?
A business line of credit is similar to a personal line of credit, like a credit card. Business lines of credit offer some distinct advantages. Here is a summary of the differences:
- Repayment: A line of credit functions like a traditional loan when it comes to repayment. The money you withdraw must be repaid in equal installments over a fixed period. You can get away with just paying a small balance on a credit card. This option sounds great, but remember that you pay a monthly fee on the card’s outstanding credit.
- Interest: Lines of credit have reasonable interest rates, and you only pay interest on the amount you withdraw. Credit cards often have annual fees, and some cards boost their rates after a low introductory period. For this reason, a business line of credit can be a cheaper borrowing option over the long run.
- Cash advances: Credit card cash advances are often a fraction of your available credit. A line of credit allows you access to your entire credit line with no additional restrictions or fees. Credit cards may charge an additional fee on cash withdrawal.
- Rewards: Lines of credit do not offer the bonuses and rewards that credit cards do.
- Access: You can write checks from a line of credit or draw money from an ATM. Credit card use is often restricted primarily to purchases. Also, a business line of credit typically offers a much higher credit limit than a credit card.
Many types of borrowing exist for small business owners to take advantage of. If you haven’t considered a business line of credit, think about how one could help you achieve your business goals.