Understanding Business Lines of Credit
Business lines of credit supply revolving funds for short-term cash flow needs. This type of financing can cover daily operating expenses, payroll, inventory or other working capital needs when revenue is down.
Business Credit Line
This flexible funding choice offers the ability to decide when and how you use the money provided by the lender. These funds are a valuable tool to have on hand in case of emergencies or dips in your monthly income.
You will pay interest, but only on the withdrawn amount. Once you repay the money you access, you can use it again when necessary. The rates are usually lower than loans, but you must make your payments on time as interest is variable.
If you maintain your account and do not exceed your limit, you can reuse the cash as much as you like. Typically, you can pay your full balance without penalties.
Business Credit Card
This kind of credit card works the same as a personal credit card. The difference between this and lines of credit is the way lenders provide funds. You receive a deposit in your bank account with a credit line, and repayment terms are more flexible than credit card payments. You can also withdraw cash from a business card, but it incurs fees and results in a higher annual percentage rate.
Approval for a card depends on your credit score, whereas a credit line requires additional financial documentation.
With traditional bank loans, you receive a set amount of money at once that is designated for a specific use. You repay the borrowed capital over a selected term with a fixed interest rate. You must start paying the loan back immediately, and you are responsible for the entire balance whether you use it or not.
Secured Credit Line
This finance type requires a deposit or collateral to secure your loan. Types of assets may include:
- Real estate
- Liquid assets
When you provide something to back your loan, you gain lower interest rates and higher funding amounts.
Unsecured Credit Line
This funding does not require collateral assets, reducing your risk. However, you must have sufficient income and excellent credit scores to qualify. This option will ultimately cost you more than a secured line, as you will likely have a lower capital limit and higher interest rate.
Lines of credit are a valuable finance option to cover short-term operational expenses when cash flow issues arise.