Every small business needs to adapt to change, especially in times of uneven growth or cash flow. If you need cash and flexible terms to repay borrowed funds, unsecured credit is often the ideal solution.
What is a Business Line of Credit?
A business line of credit is more similar to a business credit card than a small business loan. Just like a small business loan, an unsecured line of credit provides businesses with funds that can be used to cover any business expenses. However, unlike small business loans, there is no one-time payment at account opening and subsequent monthly payments are required.
Micro line of credit are subject to a credit review and annual renewal, and recycle like a credit card: Once you withdraw funds, interest starts accruing, and the amount you pay (without interest) can also be borrowed to pay off your balance. As with credit cards, lenders set limits on how much you may borrow.
Using a Business Line of Credit
The number one reason for opening a business line of credit is to obtain short-term funding. Most businesses use these funds to support operating expenses, such as supplies and wages, or to finance increased inventory. Cyclical businesses often rely on unsecured lines of credit as a source of off-season working capital.
Unlike many small business loans, an unsecured line of credit is not earmarked for a specific purpose or purchase – a great option for small businesses looking to better manage their cash flow. Funds are usually drawn from a line of credit by using a business checking account, a small business credit card, or even a mobile banking app.
Understanding Secured and Unsecured Lines of Credit
Small business lines of credit are usually offered as unsecured debt, meaning you don’t need to post collateral (assets that creditors can sell if you default). Many unsecured lines of credit have variable interest rates and are available for amounts from $10,000 to $100,000.
If the amount exceeds $100,000, you may need to secure your line of credit with a full lien or certificate of deposit on your assets.
What does it take to get a small business line of credit?
Be sure to research the specifics of any lender’s line of business credit requirements. For example, many banks will require the business to be under current ownership for a fixed period of time.
The price of a business line of credit is often lower than the price of a business credit card, which can cost as much as 20% more than a purchase with a business credit card, or even more than a cash advance.
Other Advantages
Maintaining a line of credit in good standing may help build your business credit rating and give you better loan terms when you seek future financing. Many small business experts believe that first-time applicants should start with a modest line of credit and pay off debt quickly as a way of building their credit profile.
In today’s fast-paced world, keeping small business finances running smoothly can often be a challenge. Depending on your specific business needs, a small business line of credit may be the easy solution you need to achieve your growth goals – at a pace that works for you.