Small Business Line Of Credit: How It Works And Why You Should Consider It

Every business owner will attest to this one universal truth – Businesses need liquidity to survive and grow! It doesn’t matter how much money you made last year or in the last quarter; your nest egg can only salvage so much. To finance big dreams and ward off cash flow issues, you will need a source of flexible and on-demand funding. A Business Line of Credit is just that! It gives you access to a substantial amount of money – as much or as little as you need, whenever you need it.

What Is A Business Line Of Credit?

A business line of credit is a type of funding that allows you to tap into a pre-determined amount of credit in a revolving manner. For easy understanding, we can compare it with a credit card – you have a specific limit and can use your card as and when needed. You have to pay interest on the amount used, and as soon as you pay it back, your limit tops up again, and the interest charges stop. The main features are:

  • Revolving credit- this means that you can withdraw any amount up to your approved limit (once or multiple times). When you repay what you’ve used, the funds become available again. You can reuse and repay it as often as you like.
  • The amount can be used for any type of business need.
  • You can pay back your credit line anytime without any prepayment fees.

What can SME owners use it for?

With its revolving form of credit access, LoC is a great alternative to bridge cash flow gaps in your business and finance a business need that costs more than what you have in the bank. Most SME owners use it for:

– Seasonal cash flow management

– Purchasing inventory

– Marketing expenses during the peak season

– Repair and maintenance

– Hiring extra workforce for sudden demand spurts

– Buying key equipment

Advantages of Opening a Line Of Credit

For small business owners, a business LoC can become a vital lifeline – in good times and bad. Some notable features that make it unique are:

• Easy, quick, and flexible access to critical cash
Setting up a line of credit for your business ensures that you ALWAYS have cash at hand. After the initial approval procedure, you can access (within your credit limit) any amount in real-time. There is no need for another set of approvals or paperwork. Access to cash with LoC is as quick and straightforward as swiping a credit card.

• Pay interest for what you use
Regardless of what your credit limit or terms of repayment and interest rates may be, you can be sure of only running up a bill when you use the money, and for that duration of your credit, the minute you pay it back, the interest stops.

• Improve your business rating
Using your credit well and making timely repayments help your overall credit rating climb up. A better FICO score can be helpful in the long run as it opens up the door to more significant credit investments.

• No prepayment fees
Unlike traditional credit options, a business LoC can be repaid anytime you like. Most alternative lenders are quite flexible and will allow you to pay off your entire balance as and when it’s convenient for you.

• Peace of mind
Finally, it will change the way you approach your business. With access to cash at all times, it is easy to grab opportunities and venture outside your comfort zone. Access to handy credit without paying interest on it is almost like having your cake and eating it too!

Different Types of a Business Line of Credit

Secured LoC- These are LoC options where the lender will ask you to pledge some collateral against the funding option.

Unsecured LoC– Many lenders, such as online alternative lenders, offer substantial unsecured loans. As these are riskier, the lenders usually do in-depth due diligence before approval.

How Can You Qualify For A Business Life Of Credit?

Traditional banks and credit unions usually require a full set of financial documents – and lots of time – to decide on business LoC applications. On the other hand, online alternative-lending companies take a more holistic approach and use AI and data analysis to quickly determine the creditworthiness of a potential client.

Usually, you would be required to submit documents such as:

  • Bank statements for 2-3 months
  • Financial documents like P&L
  • Tax returns and more

Some Points to Consider While Applying For a Business LoC:

  • Check all the financials regarding the credit options. Seek detailed answers about all fees, rates, and terms.
  • Get a complete list of documentation and eligibility criteria right at the beginning.
  • Negotiate for a better rate. Most alternative finance companies are relatively flexible and will offer better terms if they think your business is financially sound.
  • Consider how you will use the business LoC. Set internal guidelines for using the money and plan how you will repay it even before you start using it.

If you are a US-based business, have a business bank account, and show a regular revenue stream, nothing is standing between you and a Line of Credit! Get in touch with our payment experts and learn more!

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