Small businesses often require financing to meet various ongoing and unexpected needs. One funding option you can utilize, especially for short-term expenses, is a business line of credit. Here are some details to help you determine when a line of credit might be the right solution for your company.
Business Line of Credit Basics
Business lines of credit are similar to business credit cards. When you are approved, you can borrow funds up to a set limit, and you only have to pay interest on the amount that you have borrowed. After you repay the money, you have access to the same set amount of money again. Unlike credit cards, though, which are usually used for specific purchases, you receive funds drawn on a line of credit in cash, and you are free to use them however you choose.
Obtaining a Business Line of Credit
Banks, credit unions, and numerous online lenders issue business lines of credit. However, traditional banks generally have stricter requirements for approval concerning your credit score, time in business, and annual revenue. The requirements of online lenders are looser, but you may have to pay a higher rate and settle for a lower credit limit. To accompany your application, be prepared to submit documentation that includes bank account information, financial statements, and tax returns.
Secured and Unsecured Lines of Credit
Secured lines of credit are those that require collateral such as real estate, equipment, inventory, or other assets. If you do not repay the money you have borrowed, the lender can seize the collateral. When you obtain an unsecured line of credit you do not need to put up collateral, but lenders may insist on a lien on company assets or your personal guarantee so they are protected in case of default.
When to Benefit from a Business Line of Credit
Business lines of credit are effective when companies have periodic short-term expenses such as purchasing additional inventory. They are also useful to have ready when unexpected expenses arise.
For more advice on the benefits of lines of credit for businesses, contact Hornet Capital Solutions.