As a business owner having access to a business line of credit offers the flexibility of having cash on demand for any business need. Whether a business is just getting started and needs funds to launch or an existing business requiring money for growth and expansion; cash on demand is crucial.
Unfortunately, too many entrepreneurs and small business owners resort to personal savings; personal credits cards, and seek investors as a source of funding. A business line of credit can provide a company with the money it needs without a business owner putting their personal credit at risk or giving up control of the company to an investor.
A line of credit also gives you the flexibility to access funds anytime you need it rather than having to take out a business loan each time your company needs funding. Since it is revolving – using the line of credit helps you manage the cash flow of the business. You use the credit line when your company needs it and pay it off when revenues come into the business.
Before applying for a business line of credit it’s important to know the two most popular types of credit lines available; a traditional business line of credit and an un-traditional business line of credit. Each has its own set of advantages and disadvantages so let’s review each type so you can make sure which one is the right source of funding for your business.
A traditional business line of credit is a credit line issued by a financial institution. A bank line of credit for a business is like having a loan on tap: you take out funds as you need it, up to your credit limit. Many business owners prefer this bank issued credit line over a loan. Although it allows you to make purchases too big for a credit card and too small for a loan, there are still certain drawbacks to consider.
- Ability to make interest-only payments.
- Provides access to the same amount of funds as a loan would, and usually faster.
- Business owners can write checks against the line of credit for any type of business expense.
- Saves you money because it gives you a lower rate of interest compared to a business loan.
- Qualification is based on a multitude of factors including but not limited to company revenues, industry, financials, credit scores, and tax returns.
- Your company will be subject to financial reviews every 12-24 months.
- The line of credit can be converted into a loan due to payments not being made on time, drop in credit score ratings or cash flow changes in the business.
Nontraditional business lines of credit are credit lines in the form of business credit cards. This source of credit is used by 65% of small business owners and offers similar benefits of a traditional line of credit but without the level of scrutiny.
- Qualification is based primarily on credit scores of the business owner.
- No collateral or excessive documentation required to get approved.
- Low or 0% introductory APRs available allowing a business owner to finance purchases at little to no interest.
- Many business credit cards offer various perks, rewards and benefits such as discounts on hotels, airline tickets and auto rentals.
- The sizes of credit limits on business credit cards have limitations when compared to a bank issued line of credit.
- Typically charge higher interest rates than a bank loan or bank line of credit.
- Owners need to carefully manage their business credit cards and take extra security measures in order to protect their cards from possible theft.
Whether you decide on the old bank issued line of credit or getting a new business credit card, one thing is for certain; access to a business line of credit is crucial for a business. Think of it as an insurance policy that never needs to be paid until you actually need it.