Having funds available on hand for when it is needed can take a lot of stress off running a business. A business line of credit can provide that breathing room that you might need for meeting day-to-day working capital expenses. Here we explain how a business line of credit (LOC) can help your business today.
A business line of credit explained
Similar to a credit card, a business line of credit provides a fixed amount for when you need it. You only use the amount that you need and you only pay interest on the amount used.
Therefore, if you do not need the whole amount, you won’t pay interest on it. A LOC is used for short-term expenses, e.g. repairing equipment, purchasing stock, or marketing.
Difference between a business term loan and a business line of credit
There are major differences between a term loan and LOC. First, when lenders assess creditworthiness for a term loan, the business’s credit profile is used to determine if it is able to pay back the loan of the term.
Whereas with a LOC, the business’s credit performance today needs to guarantee future creditworthiness when the business accesses the funds. Therefore, the application process for a business line of credit is stricter.
Secondly. from your point of view, the biggest difference is receiving the funds. When you are approved of a term loan, you receive the lump sum of the loan in a few days. For a LOC, after approval, you receive access to a credit line for when you need it.
A term loan has a structured repayment schedule of a defined amount over a defined period of time. Whereas, a LOC offers more flexibility as you only use the amount you need when you need it.
There will be a minimum monthly or weekly repayment schedule, but you can repay more during better months. And if you need the funds again, it is there for you to use.
Should I consider a LOC?
You should consider a business line of credit if you need immediate funds available in the future for short-term working capital expenses. To give guidance, determine if you fall in one of these categories:
I’m a seasonal business
If you have higher sales at a particular time of year, a LOC can offer cash flow relief during the offseason. All that needs to be considered is being able to pay off the minimum repayments until higher sales come in.
Finance a marketing campaign
Marketing is an effective way of bringing in new customers. But if you do not have the extra funds it costs for marketing, a LOC can provide flexible and immediate funds to grow your clientele. That way, you will be able to pay off the loan quickly with the additional income.
Waiting on payments
If you need to cover day-to-day expenses while you wait for your clients to make payments, consider a LOC. It will help manage cash flow and keep you afloat. And when your client’s funds come in, you can easily pay off the credit.
Keep in mind that lenders will only provide a business line of credit to companies that have a high enough credit score. So your business might need to be in operation for some time to build a credit profile to qualify.
A new business may still be considered for a LOC if you can provide sufficient collateral as security. This may also decrease the interest rate for more established businesses.
A business line of credit application
The application process of a LOC is similar to other loans where you need to provide adequate information. The basic information you will need to apply will be bank statements, a functioning business bank account, and a business license.
It may be worthwhile consulting a trusted advisor for more information regarding your application to ensure success.
Take the time to fully understand the terms of the loan. Determine the interest rates, fees, and repayment schedule before accepting the LOC. If you are unsure of anything, query this with the lender. Also, consider shopping around for a more affordable lender.
How to keep a LOC
To keep the confidence in the lender, it is advantageous to keep restoring the balance of the LOC to zero. This shows that you are able to effectively use the loan to generate income. Therefore, using it to cover losses could be a disadvantage as it will be difficult to make the minimum repayments.
Ensure you maintain a positive cash flow. Even during quiet times, you will want to keep to the repayment schedule throughout the LOC term.
The flexibility and immediate access of a business line of credit can benefit your business to provide growth and stability. This can lead to the success of your business.
4 Steps To Use Your Business Working Capital Loan
Not having funds to keep your business in working flow can be a real hurdle to being successful. You might need to pay for day-to-day expenses like payroll, rent, inventory, or any short-term expense. A business working capital loan might be ideal.