What are the Benefits of a Business Line of Credit?
Introduction to business lines of credit
Here is a query that nearly every business owner has in mind. Regardless of whether they are an entrepreneur launching a new firm or have been in the market for quite some time:
How can I effectively manage my daily operating expenses?
Stock, materials, payroll, and unforeseen costs are constant. It’s possible that emergencies or seasonal variations won’t always be expected, and you’ll need money for your immediate expenses.
A credit line for businesses might be the solution. A business line of credit can effectively balance the ups and downs of business cycles.
One of the numerous benefits of a business credit line over a traditional commercial loan is that interest is typically not assessed on the unused portion of the credit line. Your company can access the line of credit whenever it needs to. You can control your cash flow by using it as an overdraft credit line as well.
Apart from this, a business line of credit offers several advantages that you may not find with other types of commercial loans. Let’s take a look at some of the most important benefits below.
Advantages of having a business line of credit
Here are the five most important benefits of a business line of credit:
- Ease of use – A closed-end loan, which must be fully repaid by the end of the stipulated term, is often used to finance a single objective, such as the purchase of equipment. A credit line for a business provides additional options and can be applied to a number of things, including paying employees and buying inventory. This enables you to choose how to invest your money in your business.
- Availability of cash immediately – In contrast to a conventional credit facility, a flexible credit line gives you the option of obtaining capital before your company truly needs it. You could feel the need to raise money to meet your company’s immediate needs due to the seasonal business environment. You can keep your operations running smoothly, day after day, by having the funds available on the line of credit at any time.
- Flexible repayment terms – Traditional bank loans have fixed monthly payments, which may be problematic for a startup company’s expansion. A revolving credit line, in contrast, provides variable terms of repayment. In contrast to a term loan, a company can pay the minimal amount payable if a month is slow.
- Separation of personal and business funds – Maintaining a strict separation between personal and work expenditures is one of the difficulties that many business owners experience. A continuous business line of credit has the advantage of allowing you to optimize and keep track of your business spending because it is only used for commercial purposes.
- Builds a company’s credit profile – Companies must establish profiles with main business credit reporting bureaus. You can establish a solid credit record that displays on your company’s business credit report by using a business line of credit. Depending on your company’s creditworthiness, this will enable you to possibly access greater lines of credit for your firm.
While obtaining a business line of credit for your company’s requirements has several benefits, it also has a few disadvantages. Let’s look at some of them below.
What are the disadvantages of business lines of credit?
Here are the three disadvantages of a business credit line that you must consider before applying for one:
- Fees and charges are higher – A credit line is more expensive than a small business loan, but it is cheaper than using a credit card. Depending on your credit, you can be faced with withdrawal and maintenance costs as well as a high APR. Negotiating these costs should be done in conjunction with your lender.
- It may be challenging to qualify for – Applying for a commercial line of credit can be difficult, based on where you do it. Credit unions and banks in particular have strict qualification requirements and might ask you to put up collateral. During the application process, you can anticipate being asked to submit thorough financial accounts. Applying for a loan through online vendors might be easier compared to banks and credit unions, however, it may also be a little more expensive.
- It needs to be handled with care – Short-term cash flow requirements can be easily met with a corporate line of credit. But you must handle it cautiously, just like you would any other kind of debt. If you don’t keep track of your repayments from the beginning, it’s easy to get yourself into a debt trap that keeps piling up.
If you can manage your debt are okay with associated fees, it’s still the better alternative to traditional loans. It’s important to weigh the cons against all the benefits you would get before making your decision.
Next, let’s look at the different types of business lines of credit you may access.
What are the different types of business lines of credit
There are two types of commercial credit lines: secured and unsecured.
- Secured – The business must offer assets as collateral for the secured option. Lenders may request the applicant to offer account receivables, monetary assets, deposit accounts, etc. as collateral for a line of credit. The lender liquidates the offered collateral to recoup debts if the company is unable to repay the accessed credit line by the deadline.
- Unsecured – In contrast, the company does not have to put up any assets as security in order to choose the unsecured option. The availability of the credit line facility is determined by the company’s cash flow status and the stability of its financial statements. In some situations, the owner must offer personal guarantees in order to obtain the corporate line of credit.
Conclusion: The importance of having a business line of credit for your business
The idea that it’s best to have access to funding before you require it is a widely accepted unwritten business norm. You risk not receiving the financing you require in time if you wait to apply for a loan until your company is in need. This is why obtaining a business line of credit may be a wise decision for most companies.
There are a lot of advantages to securing a business credit line. It is also the better option between a line of credit, a credit card, and a traditional business loan. Speak with a Star Funding representative to learn more about how to secure the best line of credit options for your business.