Having a line of credit gives your small or medium sized business easy access to money as you need it. Most lenders reserve lines of credit for businesses with a proven track record of fiscal responsibility. Once established, however, they can help you deal with unexpected cash flow issues, fund the purchase of new business equipment and inventory.
Lines of credit may be secured or unsecured, depending on the lender and your credit record. Almost all lending institutions require a nominal annual fee to cover the cost of administering their business lines of credit.
Here are some things to consider when comparing a business line of credit with other funding sources.
Business Lines of Credit vs. Conventional Business Loans
Even though business lines of credit typically have higher interest rates than conventional bank loans, they are usually lower than the interest rates charged by most credit cards. As with conventional business loans, lending institutions will only charge interest on the outstanding balance of your business line of credit. And, as with a conventional business loan, your line of credit will have a set limit which will be agreed to by you and your lending institution.
Business Lines of Credit vs. Business Credit Cards
Although credit cards typically charge higher rates of interest than credit lines, they also offer a number of advantages; the most obvious of which is convenience. In order to access your line of credit, you’ll first need to transfer funds from it into your business checking account. This may work well for larger purchases but for most, smaller purchases credit cards are usually the way to go.
Credit cards also simplify your record keeping and make it much easier to track expenses. This can be a tremendous advantage when preparing your taxes. Finally, many credit cards offer attractive perks including frequent flyer miles and rewards programs that offer discounts on everything from office equipment to travel, dining and entertainment.
For most businesses, having both a line of credit and at least one business credit card makes sense.
Emergency and Non-Emergency Funding
In today’s uncertain economic climate, having a business line of credit is like having a safety net to protect your business from unexpected changes in your cash flow situation. They can also be beneficial to seasonal businesses and when purchasing large inventories that will take several months to resell.
As mentioned earlier, business lines of credit are ideal when purchasing items that would be too expensive to place on a credit card but not expensive enough to warrant taking out a conventional business loan. In most cases, using your credit line to meet payroll, purchase business property or finance a major purchase is not recommended. In such situations, a conventional business loan is usually the way to go because of their longer repayment periods.
Finally, business lines of credit allow you to repay and borrow again as the need arises. You can continue borrowing against your line of credit as long as you make timely payments on your outstanding balance. Doing so will also help you build a strong credit history which makes it easier to borrow in the future and, in most cases, will lower your cost of borrowing.