A business line of credit allows businesses to withdraw money, as they need. There is a set limit, which is agreed to by the both the lender and borrower. This allows businesses to expand and run businesses over a period, without withdrawing money and paying unnecessary interest.
Business lines of credit can be either unsecured or secured, with some requiring a minimal annual fee to cover any necessary administration costs. Most business owners prefer this type of credit to traditional loans. Highlighted below are several advantages to using a business credit line versus a business cash advance or credit card advance.
- Lower Interest Rates – Rates for credit lines are higher than conventional loans, but they are far less than credit card cash advances.
- Cash-Flow Management – Credit lines can greatly help businesses. They can even out cash flows for seasonal, predictable or industry-specific inventories.
- Purchases – Buying inventory and supplies that are too expensive on credit cards can cost businesses high interest rates. However, purchases that are not costly enough to take out convention loans can be expensive. A credit line is ideal for these types of purchases, provided they do not exceed the maximum amount and are paid in full within the required timeframe. A business line of credit is not recommended to finance major equipment, finance property or pay employees. A business loan with a lengthy repayment period and lower interest rates are better options for these payment matters.
- Emergency Funds – Lines of credit are excellent for emergency funds. They are perfect for short-term emergencies, but should not be used for long-term, extended cash payments.
- Repayments and Borrowing – Credit lines offer borrowers the ability to conveniently pay off loans and borrow against them again. This opportune feature is unlike traditional loans.
Business lines of credit can also work as working capital loans, allowing startups to get their businesses off the ground. The best way to obtain a business line of credit is to write a business plan, check personal and business credit scores, apply for business credit cards, talk to companies about obtaining business lines of credit and consider how much startup funds a new business will require. It is important to remember that these funds are not long-term funds, but are short-term and need to be paid back as soon as possible. These funds are ideal for supplementing venture capital funds and other startup monies.