One thing that is true about businesses is that they run in an endless cycle of ups and downs. A business line of credit is the answer to resolving the dilemma of not having money to meet goals or secure resources when they are needed. With a line of credit, business owners can draw on funds immediately to put out any fire that comes up such as purchase or repair of equipment, payroll or other business expenses. What is a business line of credit and how does it work?
In general, a line of credit is an arrangement made with a borrower and a financial institution that establishes a certain dollar limit that can be accessed when needed. A business line of credit is designed specifically for companies, which in most cases means the credit limit is higher than a line of credit for an individual. Why? Because business costs and expenses are much higher overall than for single consumers.
Credit that can be used, paid, and then reused is referred to as revolving credit. Lines with lower limits are usually unsecured. Higher limits require collateral such as equipment or other assets. Another revolving type of credit is a credit card. Lines of credit differ from an installment loan or mortgage, for example. Payments on these loans are made until the amount borrowed is paid in full, which ends the contract.
Some benefits of a business line of credit include:
The flexibility of a business line of credit makes it an attractive option for seasonal businesses as well. With the convenience of getting cash fast, businesses can navigate the twists and turns their company takes without breaking stride in daily operations.
Statistics show that people who use personal credit cards and savings to start up a business regularly fail when the money runs out. For businesses, having a line of credit on deck can sometimes make the difference between fat profits and permanently closing the doors. Established businesses rely heavily on business lines of credit for funds specified for short term necessities.
Common uses for a business line of credit:
Many businesses simply keep the money from a business line of credit on hand as a temporary safety net in the event of an unpredictable circumstance during a slow accounts receivable period. However, using a credit line as a bailout for an ongoing financial shortage is a recipe for disaster. It results in more debt that can swallow the business whole in a single bite.
In an ideal world, business owners have enough money saved up to weather any financial storm that comes their way. In the real world, chances are that this is an extremely difficult, if not impossible, goal to achieve-especially for new businesses.
A business must meet the following requirements at a minimum to get approval for a business line of credit from a traditional lender:
Online lenders have less strict qualifications than banks and other financial institution. They also tend to charge higher interest rates and fees. Online lenders may offer lower credit limits to applicants. Most require that the borrower have a minimum of $25,000 revenue a year. Some lenient online lenders will approve a business line of credit with a credit score of 500+.
Other points to consider with regard to a business line of credit:
It is a common practice for new businesses to rely on a line of credit to get them started and to carry them through the highs and lows of running their company. On average, business lines of credit range from about $25,000 to $250,000. However, some of the largest and most established global companies use the financial tool to increase their power in the business world.
Every company must maintain positive working capital, whether for short-term debt or operation expenses. A business line of credit is an appropriate financial back up for the smallest of enterprises as well as world renown corporations. It is a savvy way to manage all aspects of running a business while growing both the business and its credit profile at the same time.