Finding ways to fund our companies is essential for business owners. It is common for entrepreneurs to consider a term loan as the first (and sometimes only) option. Here, you borrow a fixed amount, say $50,000 and have set monthly payments until the loan is paid off over a term of 3, 5 or 7 years. However, applying for a business line of credit might be a better idea. It can bring more flexibility regarding payment options, and it is also a great way to keep cash flowing constantly. Unlike loans, a business line of credit can be used as many times as you need, as long as you keep making your timely payments. You can borrow again on the line of credit for your business as needed, pay back down the line and then borrow again as needed.
This type of credit tends to be for a lower amount, and we can manage like a credit card. Before you decide to go for a business loan or a credit line, we need to discuss what exactly is a business credit line. We will also go over the different types of credit lines, and further advantages of having one.
A business line of credit is a type of credit that a bank or financial institution can approve for any business owner. Similar to a business loan, a business credit line comes with a fixed limit amount. The difference is that a credit line tends to give a lower amount than a loan would. Companies usually need a business credit line to cover short-term expenses. Some examples include covering payroll, paying suppliers, and taking care of any other unplanned expenses.
Term loans tend to be used as the capital to acquire equipment and whatever else is necessary to run the business, whereas a line of credit provides an ongoing source to keep cash flowing for the working capital needs of the business.
Keep in mind that lending institutions restrict the use of funds, so you should use it to cover business-related expenses only. Depending on the amount you need to have available, you might be eligible for a secured or an unsecured line of credit.
There are two main types of business credit lines, secured and unsecured credit lines. Most of the businesses that apply for credit lines need smaller amounts than those of loans. Usually, for amounts between $10,000 and $100,000, business owners can apply for unsecured credit lines. This means they don’t need to secure the credit line with any assets.
When we request a credit line that exceeds the $100,000, typically, the banks would need to secure the credit line. This means we will need to have assets or valuables to work as collaterals in case we failed to pay back the amount that we used from the credit line. Depending on your business needs is the type of credit line you’ll request.
If you decide that a business line of credit is the best for your company, several advantages await. First of all, it is easier to track your business’s expenses, as you will receive monthly statements with detailed information about how much you spent and on what. It also enhances your company’s credit history, making it more financially reliable. It is also the fastest way to cash when you need it. Since most businesses use loans for larger expenses, a business credit line covers you in the short run.
Another affordable and convenient way to fund your business and obtain the capital you might need instead of applying for a business line of credit is, factoring your accounts receivable. This would allow you to receive a cash advance in a timely manner and spend it without any restrictions. Besides, this is a great way to access cash immediately, without having to wait until the approval process is over.