Everything You Need To Know About Business Lines Of Credit
Businesses occasionally require more capital. The additional money helps them to add inventory, hire more employees, expand the company, or meet the day to day expenses. And while it might not be possible to secure business financing from banks, the unsecured lending options such as business lines of credit provide an excellent solution. A business line of credit is a financing option that provides immediate cash for the business to settle their emergencies. However, this financing option does not offer a lumpsum disbursement as many loans do.
How It Works
A business line of credit allows the borrower to withdraw small portions of money when the need arises. The loan has a credit limit, but the borrower only pays interest for the used funds. This type of loan has a revolving feature meaning that the borrower can easily re-access the credit limits after repaying the initial investment and its interest. There are various types of lines of credit wherein some are secured, and others are unsecured. They, however, require the borrower to pay a small annual fee, which the lender uses for the administration expenses. You can get a line of credit from a bank, online lender, alternative lenders, and many others.
- Emergency funds – you can rely on a line of credit during tough periods.
- Revolving – you can borrow again immediately after repaying the initial credit.
- Lower interest rate – the interest rates are lower than that of a credit card.
- Financial independence – the lender does not dictate how you will use the cash.
- Flexibility – a corporate line of credit helps entrepreneurs to get money when they need it.
- Builds your credit rating – you can use the loan as a stepping stone to qualify for higher loan amounts in the future.
Types of Lines Of Credit
There are two main types:
- Secured – this type requires the borrower to offer an asset as security for the loan. The assets are short term, such as inventory and accounts receivable.
- Unsecured – they do not require any collateral provided that the borrower has a guarantor.
Line Of Credit Application
Similarly to many term loans, lenders consider financial records and documents. The borrower should be ready to discuss their current business position with the lender. The qualifications and application process vary among lenders.
A corporate line of credit is a valuable financing tool for businesses. It is flexible; hence it helps the users to cover their cash flow gaps.