Business lines of credit give your business access to cash whenever capital is needed. It gives you more flexibility than many other sources of financing because funds are available when you need them, and you pay no interest until you draw on them. This means your regular business operations will not have to stop as you wait for cash to pay your employees, purchase inventory, advertise, and run the various operations of your business.
Business lines of credit can be secured or unsecured. They come with variable interest rates and multiple repayment options. Unlike a loan, a business line of credit can be used without reapplying each time funds are needed. Business lines of credit are a continuous source of financing, much like a credit card, yet they typically come with lower interest rates, higher credit limits, and no monthly bill.
Unsecured Lines Of Credit
If you’re a small business owner in need of extra cash, unsecured business lines of credit may be right for you. It lets you obtain financing without the use of business collateral, such as office space, equipment, inventory, and accounts receivable, or personal collateral, like your home.
However, since it poses a greater risk to the lender than a secured line, the unsecured line of credit is typically much more conservative and the interest rates and penalty charges can be substantially higher. The lower credit limit may prevent you from making large purchases, but this can also work to your advantage, since it can prevent you from accruing large debts.
Unsecured business lines of credit give you financing in the early growth phase of your business, which can often be when you need it most. At a time when you may be strapped for cash and don’t have substantial collateral to offer, it can help you make payroll, pay vendors on time, avoid steep penalties, and increase marketing initiatives to bring in more business. Since sales tend to fluctuate, it’s important to have a backup plan so your business doesn’t fail. By paying back just the interest on an unsecured business line of credit, you can keep the line, which is essentially a cash advance and leverage the money available.
But many small businesses don’t have the track record to obtain unsecured business lines of credit and startups usually aren’t approved. Since you never know when the need for instant cash might arise, it makes sense to ensure ahead of time that your business will qualify, especially since a line of credit is likely to be approved much more quickly than a loan.
Secured Lines Of Credit
Secured business lines of credit are often preferred by larger businesses because, by putting up collateral, they’re able to access far greater sums of money - as much as 10 times more - at significantly lower interest rates. The most common form of collateral is a company’s current operating assets, which are the accounts receivable and/or inventory. Lenders may prefer accounts receivable to inventory because the latter can be less liquid, but they often go hand-in-hand.
Lenders want to see a positive business credit history. You typically need to have been in business for at least two years and have some business loans or other business lines of credit that report your credit history to the Small Business Financial Exchange. This credit functions just like your personal credit scores. The better your credit rating, the more attractive interest rates and repayment terms you’ll receive.
Many business owners go with the bank that holds their personal accounts because they already have an established relationship. But it pays to shop around, since terms vary widely among lenders. It’s important to consider the entire equation; prepayment fees may be part of the agreement and while they can often be negotiated, they must be factored in, along with interest rates and repayment terms.
Choosing the right type of business credit line for your company largely depends on your financial needs and spending style. But whatever you choose, the important thing to remember is your obligation to pay. While unsecured business lines of credit protect you from property loss, you’re still responsible for timely repayments and other terms of the agreement. Failing to meet them can be devastating to your business credit history and ultimately, your business.
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