Having a line of credit for your small business can be advantageous in so many ways, allowing your new company to thrive and grow. Unfortunately, obtaining a line of credit can often be difficult, especially for business owners who don't have the best credit scores. While there are a variety of financing options available to small business owners, a line of credit is often the best choice for those who have occasional financial needs.
Opening a business line of credit gives you the necessary capital that you'll need when maintaining inventory, meeting urgent company requirements and fulfilling orders. It'll also help with consistent cash flow so that you can easily make and track business expenditures. Many business owners use their new line of credit to plan funds for eventual expansion.
A business line of credit is one of the main options used by small business owners for routine financing. When you are able to qualify for this choice, you will receive a specific maximum amount that you can borrow against at any time in the future, so long as you follow contract requirements. Interest rates on business credit tend to be quite low compared to other options on the market, but they can also be variable, which means that your rate can increase in the future.
You can borrow a large lump sum of cash for business purposes when taking out a small business loan. Typical lenders, like banks, will offer anywhere from 5 to 12 percent interest on loans, with the borrower choosing if they want a fixed or variable rate. Obtaining your loan from an online retailer may result in a higher and less affordable interest rate. Taking out a business credit card is similar to acquiring a personal one, as these have some of the highest interest rates in the industry, with some well over 25 percent. Many of these loans and credit cards require a personal guarantee to be made, which means that if your business should fail, your own personal credit score will be effected.
Different Key Options
Considering the range of financing options available to you, it can often be difficult to know which one is worth pursuing. Here are some key differences in the opportunities available to you:
Overall Usage – Once approved, you'll receive your needed funds in one lump sum. You can borrow up to your allotted limit on the new credit card as often as you like, so long as you continue to repay your lender.
Remittance – If you've taken out a credit card or business loan, you'll receive monthly payments that need to be paid on or before the due date. However, you will only be required to make payments on a line of credit if you actually use it.
Interest – Loans have a set interest rate that will be included in each monthly installment. For your business line of credit, interest is not incorporated unless you actually borrow money and you won't pay any interest at all unless you've used all of your credit.
Approval – There is a relatively lengthy approval process to obtain a business credit line or loan for your company. The stringent requirements often make it difficult for many small business owners to get approved. Taking out a credit card is much quicker, so this is a more viable option for individuals who need quick and easy cash.
Choosing the Best Option
Considering the flexible borrowing limits and low interest rates, taking out a line of credit for your business can be the best choice for constant financial needs. Lines of credit come with a more flexible payment schedule, also offering affordable closing costs for business loans.
You have the option of applying for either a secured or unsecured line of credit. You will need to utilize hard assets when applying, such as your vehicle, home, business equipment or property. These will be used as collateral on a secured line of credit if you should ever default on your payments. Taking out an unsecured credit line does not require collateral, which makes it more difficult to qualify for it. Unsecured lines may also have higher interest fees due to the increased risk factor to the lender.
In order to qualify for a line of credit, it's important that you maintain good personal and business credit history. You will need to prove to the qualifying bank that your business generates a prosperous cash flow, as many lenders will judge this and determine if you are a viable candidate to make routine payments.
Oftentimes, business owners will apply for a low line of credit at first and then seek an increase later on, but it's important to not get locked into an agreement that you're not happy with right off the bat. Your line of credit is fully intended to support your company during the darkest of times, so you should avoid opening a line of credit when you're truly struggling and are unable to get the best rate.
William Anderson has been working with small business owners for the past 10 years. He got his start at an investment bank, but felt that he was too detached from where real people were making decisions that affected local economies. As a result, he took his experience and his MBA degree to work helping local small businesses.