Business owners have several options to choose from when it comes to seeking additional funding for their companies.
One of the most important — if not also the least understood— is the business line of credit.
Business lines of credit are pretty much like credit cards. It is a short-term alternative credit line that offers the borrower a pre-determined amount of money. However, unlike typical business loans, this money isn’t given in lump sum. Instead, it works like a credit card — it’s a credit line you can draw money from. And like credit cards, you are only charged an interest rate for the money you took out, not for the entire loan amount.
This has many advantages, obviously. A business line of credit can be taken in times when you need money but you’re not sure how much cash you actually need. It’s also the best financial product to take when you need money — but not immediately. In short, it’s an additional layer of protection for your business’ finances.
How to quality
Of course, lenders need to assess your business if it would qualify for business lines of credit. Some of the factors that would be looked at include the company’s profitability, duration or age of operations, bankruptcy claims or tax liens (or lack thereof), and, at time, cash flow.
In addition, the borrower’s financial history — in particular, his credit score — will be looked into. However, as with business credit cards but unlike business loans, business lines of credit won’t affect the borrower’s financial history. Therefore, if you default on your business credit line, it won’t affect your personal credit history and credit score.
Types of credit lines
In any case, there are basic types of business lines of credit: secured and unsecured.
Secured credit lines would require the business to pledge an asset or property as collateral for the loan. As with the typical loan, after all, a business line of credit is still a short-term liability. Lenders may require business property, equipment, and other capital assets in order to give the loan. Naturally, if the borrower fails to repay, the lender gets ownership of the collateral.
This type of credit line is perfect for businesses that may not normally qualify for a loan; businesses that don’t have too high of an annual revenue or businesses that are not yet two years in operation (the time frame usually required in business lines of credit).
Unsecured credit lines, meanwhile, are pretty much that — a credit line that requires no collateral. On paper, this seems like the better option. However, without a collateral, the credit line may have higher interest rates and fees. In addition, lenders may be more stringent when it comes to approving credit line application. Here, business owners should have higher revenues, stable cash flow, a good business track and stronger credit. Unsecured credit lines are also smaller since it is riskier than secured credit lines.
In any case, both types of business lines of credit offer the same benefits. It is the perfect aid for your business.
If you need extra capital for your business, you can apply for a business line of credit. Learn more about this financing option at businesslineof.credit. There are also great tips from this post about business loans: https://www.mbda.gov/news/blog/2015/08/small-business-funding-how-get-business-loan.
If you’re looking for financing options for your business, there’s a ton you need to know. Find out about business line of credit and more at businesslineof.credit.