There are many ebbs and flows in the small businesses, and the line of credit is the ultimate way out for your businesses to resurge in critical situations. Small businesses mostly encounter the problems of cash flow, so for them, a line of credit is of great importance to cope with the hard times, and so it proves to be a lifeline. The line of credit is different from the term loan as you can keep reusing and repaying it as long as you like or need to do it. Mostly, lenders offer you to repay the money before time so that you can avoid interest. If you are thinking that your business is profitable and you don’t need a line of credit then you are absolutely wrong. A vast majority of the entrepreneurs who even don’t face cash flow problem, keep the Unsecured business line of credit for unexpected growth opportunities.
How a business line of credit works?
In business, you have to keep some money reserved to maintain good performance and ‘Line of Credit’ is a good option for that. It is also called a revolving line of credit. Line of credit is much similar to credit cards with a few limitations. Unlike other business loans where you have to pay back the money daily, weekly or monthly, unsecured business line of credit is only repaid when the business draws from the line. Interest will only be charged when you decide to pull the money from the line. There is a specific repayment time of the line of credit but there is no penalty when paid earlier like credit cards.
Secured vs Unsecured Business Line of Credit
The lenders mostly tend to use the secured line of credit because they feel it safe. A secured line of credit is the line in which collateral is required for security purposes. When the collateral is present then the lender feels secure in lending hefty amount to the borrowers.
The businesses with low credit usually prefer the unsecured business line of credit because there is nothing set as collateral but the interest rates are mostly skyrocketing. Business with poor credit mostly uses credit cards which are the type of unsecured business credit line. Therefore unsecured business lines of credit are more expensive because the lender feels more risk.
Uses of The Business Line of Credit
The business line of credit is not used if you want a long time project to be completed on time. For such purpose term loan is better. Following are some uses of business line of credit:
- To secure your business from the seasonal fluctuations
- During the period of low sales, business line of credit will help you
- If any client pay you after 30 days for any product then you can use a line of credit during this interval
- If you have a large project and need money to complete it then you can use the line of credit
- If you pay back the money earlier you will receive a discount
Requirements for a business line of credit
The lender will check many things about your business before giving you the loan. First of all, a lender checks the time since your business evolved, and it must be at least two years. Then the most important thing the lender checks the cash flow of your business. If it is low, the lender will not prefer you. Another thing that lenders critically note is your ability to secure the line. The secured line is much inexpensive as discussed earlier so if you want it then you have to offer a collateral to the lender.