For many businesses, having access to working capital is key to being able to manage overhead, as well as being able to have the funds available when growth opportunities present themselves. One of the options for financing is a line of credit, which can provide ongoing funds instead of just a one-time loan.
Here is what a line of credit is, the advantages of a line of credit, and the benefits of using them.
What is a Line of Credit?
A business line of credit is a flexible loan that works similarly to a credit card. You can draw money from your line of credit as needed, and then you only have to pay back the borrowed funds. As you repay the line of credit, then you have access to those funds again. Your business line of credit can be accessed using a business checking account, credit card, or mobile app.
Depending on the lender, your line of credit can be unsecured or secured with assets that the lender can claim if you fail to pay back the line of credit.
Advantages of a Line of Credit
Getting a line of credit has a lot of advantages for your business. First, the line of credit is consistently available. Unlike a short-term loan, you can continue to access the line of credit. It is a revolving source of funds instead of just a one-time infusion of capital.
Second, you can access funds as you need them instead of just receiving one lump sum. Plus, you only pay interest on the funds that you access from the line of credit.
Third, the interest rate is typically lower on a business line of credit than on a standard business credit card, although the interest rate is likely to be variable. Lenders can set the limits and terms on your line of credit based on factors like how long you have owned the business and your annual revenue.
Fourth, you can typically renew a line of credit annually, meaning that your business can continually access the funds over several years.
Requirements for a Line of Credit
Lenders typically have a few requirements before offering you a business line of credit. These include:
- Being in business for a minimum of six months
- Minimum annual revenue
- Credit score requirements as set by your lender
Line of Credit Versus Business Loan
A business line of credit is a type of revolving credit, and as long as the credit limit is not exceeded, you can withdraw funds as needed. On the other hand, a business loan is a lump sum with a fixed interest rate, and your loan payments start immediately whether you have used the funds or not. Business loans may also be limited to specific uses, whereas a line of credit can be used in a variety of ways.
Lines of credit can offer flexibility to businesses, giving them access to funds when needed, especially when cash flow can vary from month to month. To find the right financing mix to fit your business’s needs, talk with our team today. We can walk you through the process of applying for a line of credit.