Crucial Lines of Credit Now Available to Small Businesses
Small businesses, particular startups always find a line of credit useful to tide over sudden working capital crunches which may force their operations to grind to a halt.
Any organization with a line of credit can draw funds against a pre-set credit limit. Whenever funds are required, a request for a drawing is made to the lender. Subsequently, after the drawing, the borrower has to repay in regular installments to pay off the balance. Additional fees are levied on the amount outstanding.
Most commercial lines of credit have certain restrictions on how they can be used. Obviously, one reason is for business expenses only like paying off suppliers or regular bills, taking advantage of new opportunities, or tiding over shortfalls in cash flow. A revolving line of credit, on the other hand, works more like credit cards, even though in a more complex manner.
Once you have an appropriate line of credit for your small business, consider yourself ready to take it to the next advanced level. This is often a more affordable choice as compared to a typical business loan because interest is payable only on the funds utilized. However, acquiring this loan depends entirely on your present credit scores and how much you are perceived as a risk by your bank or lender.
Advantages of a Line of Credit
Financial flexibility—The right line of credit allows you to be more flexible than any closed-end loan as you get to access money only when required. No interest is required for funds that aren’t used.
Staying in control—A line of credit enhances the chances of furthering a business’s goals without having to bring in external investors, who might demand some control over the business in lieu of their financial support. Moreover, having a line of credit prevents you from dipping into personal savings or taking loans from family and friends.
Established credit history—When you build a strong credit history for the business, you better your chances of getting future loans and credit accounts.
In addition, a line of credit for any small business helps in expanding, remodeling or upgrading facilities; purchase additional inventory; to buy new equipment; create new product prototypes; launch new online marketing campaigns; pursue any promising business opportunity, and to cover unexpected expenses.
However, even though you may have multiple benefits from a business line of credit, certain factors need to be carefully considered while ascertaining if it’s really an ideal financial option for a business’ uninterrupted cash flow. The following four lines of credit may be explored by any small business or enterprise:
Conventional line of credit—The traditional or typically conventional line of credit is ideal for experienced and established business owners who have proven business models. This certainly makes sense as the credit maximums are all sizable, interest rates are relatively lower, and requirements include revenue reporting annually and better credit scores. These are usually available from any bank which contains your business’s bank account.
Compared to term loans, lines of credit may have lower interest rates as also closing costs. However, these draw substantial interest if the account is overdrawn and the borrower fails to repay the overdrawn amount.
For any small business owner, having a line of credit implies having the flexible cash for spending on business expenses that are seasonal and payroll as also other assorted operational costs. It is also an insurance against unforeseen emergencies and to take advantage of sudden good opportunities. In simpler terms, it’s that capital cushion readily available as soon as you need it.
Equipment-backed line of credit—Beyond a traditional and a short-term line of credit, a small business owner is also at liberty to explore a line of credit that is backed by certain and specific collateral. Such collateral may be in the form of business equipment, and it works as follows: Lenders that are asset-based bother more about a borrower’s future prospects rather than his borrowing history. As the business acquires any necessary and expensive equipment in the form of a vehicle, state-of-the-art machinery, printing presses or sophisticated digital equipment – the lender who is equipment-backed hands over the line of credit to the borrower based on the equipment value.
The most acceptable part of this particular type of line of credit is that it tends to be more relaxed in terms of requirements even if its interest rates and maximums don’t dip. However, this is again based on the lien cost, or ownership claim in cases of loan defaults, on the new equipment. The lender relies on the equipment value or inventory, instead of the borrower’s history, in order to feel confident about the loan.
Line of credit (short-term)—A short-term line of credit comes with a relatively higher interest rate, faster turnaround time, low credit maximum and more flexible application requirements. Unlike a conventional line of credit, a short-term line of credit is generally offered by alternative lenders rather than banks and appeal differently to individual business owners.
A line of credit over the short term is ideal for those new businesses that have relatively smaller annual revenues or lower credit scores. Moreover, even though such lines of credit tend to be more expensive, they give younger and smaller businesses the pristine opportunity of maintaining a flexible capital pool.
Line of credit (invoice-backed)—Invoice financing is also known as financing for accounts receivable. Sometimes, it so happens that customers may take longer than usual to make payments — but as a business owner, you may not be in a position to hold on.
That’s why instead of resorting to short-term working capital loans or eroding your savings for covering your operating costs, you can get those invoices paid off right away at a cost, of course. In a line of credit that’s invoice-backed, the invoice value determines the credit maximum, and capital may be drawn as required instead of leaning on customers to pay up sooner or promptly. Subsequently, as invoice values increase, more cash can be accessed from the line of credit also.
In summary, for small business owners who dream of growing their opportunities or easing their cash flow problems, one of the above-mentioned lines of credit is most likely to work as the business’s safety net. Do not worry too much, their flexibility is almost unparalleled. You can also apply for business credit card options if that's more appealing.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.