The Ins and Outs of Business Lines of Credit
If your business could use an increase in working capital, but you aren’t keen on seeking a bank loan or using accounts receivable financing, there are other alternatives. Lines of credit offer a flexible financing options for companies who could benefit from extra funds. Here are the basics of this financing option.
What it is.
Rather than a lump sum payout from a traditional loan, a lender may offer an expense account, which is a pre-agreed amount of money eligible to be borrowed at any time. Although a loan comes with a fixed monthly payment schedule, the credit line can be repaid at any time. Purchases drawn from the account decrease the amount of available funds, but repayments are counted toward the total balance and re-release the funds for additional use.
How they differ from loans.
Lines of credit offer a company flexibly with their financing. Funds can be drawn at any time, and can be used for whatever you want. Unlike an equipment loan, which must be used strictly for an equipment purchase, a credit line is an option for a wide range of business expenses. Rather than the lump sum payout received from a loan, the credit line allows for multiple draws on the account provided the maximum limit hasn’t ben reached and payment terms are met.
While the ability to have instant access to cash is a bonus for many small businesses, quick financing can be an expensive way to fund your business. The details vary from lender to lender, but some will charge an origination fee for loan agreement, monthly maintenance fees, draw fees and bank wire fees. The interest rates associated with the credit terms may be competitive with a traditional loan, but it is best to check with several providers.
The ability to insert working capital into your company with few strings attached is a benefit of working with lines of credit. The credit score required for approval may also be more appealing and feasible given your business history or past financial situations, especially if applying with a personal credit score. By strategically using the cash to boost operations, you may increase your overall revenue and grow your business. If your company is facing an unexpected increase in sales, the funds could be used for labor expenses or incentives.
Always consider your company’s needs and research potential lenders offering lines of credit. It will ensure you make the best choice for your business.