When it comes to obtaining funds, business owners have many options. This article focuses on one in particular: business lines of credit, which offer flexibility that other sources of financing do not.
What Are Business Lines of Credit?
Put simply, a business line of a credit is a pool of money you can draw from. Here’s how it works: If a lender extends to you a $10,000 line of credit, you can borrow up to that amount. If you withdraw $5,000, you’ll be on the hook for paying that back plus interest based on the payment terms outlined in the agreement. You’ll also have $5,000 more to draw from, should you desire. As you pay the original $5,000 withdrawal down, the pool of money you can draw from will replenish.
Why Are Business Lines of Credit Useful?
Business lines of credit offer a couple of advantages over traditional loans. In the above example, if you took out a loan for $10,000, you’d be responsible for paying all of that back plus interest. But with a $10,000 line of credit, you could withdraw–and pay interest on–on a lesser amount, yet still have access to $10,000 should you end up needing it. Additionally, if an unexpected, pressing expense arises, having a line of credit available can be a much quicker way to access funds than going out and applying for a loan.
Applying for a Business Line of Credit
As with other types of funding, lenders are cautious about to whom they extend business lines of credit. To boost your chances of getting one:
Research and complete all necessary paperwork.
Be able to show that your business has a healthy revenue stream.
Limit the debt you take on.
Make on-time payments on the debt you do have.
Be open to a secured line of credit, which is when a business puts up assets as collateral for the line of credit.
Before you accept a business line of credit, you should become knowledgeable about the fees, payment schedule, and interest rates involved. But once you have one, you’ll likely find it a great help.