Things You Need To Know About A Small Business Line Of Credit

Every business needs additional working capital at some point in their operation. When you are ready to expand or when you are experiencing a downturn, it is essential to have an accessible additional cash to sustain the business for the time being. You may need some assistance in scaling up your business or in upgrading your pieces of machinery to accommodate more customers. These changes could entail major expense. As a small business, this could greatly impact your operational costs. Opening a small business line of credit could sustain this sudden change in your business.

What is a small business line of credit?

A small business line of credit is a financial loan granted by alternative lending companies. Some banks also provide a small business line of credit provided you attain all their requirements. A small business line of credit provides the business owner with access to money that can be utilized to fund any business expense that arises. It works similarly like a credit card but with a slight modification in terms of payment and penalties. There are two types of small business line of credit – secured and unsecured.

Types of Business Line of Credit

Secured Business Line of Credit – a secured line of credit requires the business owner to put up collateral.

Unsecured Business Line of Credit – an unsecured line of credit that will not oblige you to put up collateral to guarantee the loan. It comes with a variable range of interest rates and available in increments ranging from $10,000 to as much as $100,000. For amounts greater than $100,000, you will be mandated to issue a blanket lien on your assets or a certificate of deposit.

Cash Disbursement

Unlike regular traditional loans that release a lump-sum of money and requires you to follow a monthly payment scheme, a small business line of credit allows you to have access to a ready funding at your own disposal. You are given a credit limit –say $100,000—that you can draw when the need arises. Interest charges start when you decide to draw on the line and will only apply to the amount you have drawn and not on the set credit limit. 

It is, however, subject to credit review and annual renewal. A small management fee is charged for a dormant line of credit. It is a revolving fund in which the amount you have paid less the interest will then be accessible to be loaned out as you pay down your balance.

How to use a business line of credit?

The main purpose to open a business line of credit is to have a ready access to short-term working capital. Most businesses use the funds to support business operations during downtime in sales, to increase inventory, or to sustain payroll for the time being. More often than not, business owners use the unsecured line of credit to better manage income flow. Funds are usually drawn from the line through a small business credit card, a business checking account, or even a mobile banking app.

How to qualify for a small business line of credit?

Each lender has its own policies, terms, and conditions in obtaining a small business line of credit. Some companies have online applications that you can easily access and submit inquiries to. Interest rates vary from company to company. Generally, rates for a business line of credit are lower than that of a business credit card.

What are the advantages of having a small business line of credit?

If you maintain good standing in your business line of credit, it will open you for bigger opportunities of getting bigger financing options in the future. This will, in turn, help your business grow and expand exponentially. Seasoned small business experts’ advice for first-time applicants is to start with a modest line of credit and pay off the debt quickly. This is a sure way to build a positive credit profile.

Running a small business and keeping your finances organized and smooth can be challenging especially in today’s fast-paced changing world. You need to constantly adapt and innovate with your products or services. Depending on your business needs, a small business line of credit could be the ultimate quick solution to stay relevant and competitive in your chosen business industry.

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