Know Your Business Line of Credit Benefits
By: JeFreda R. Brown
As a business owner, you’re probably well aware of the many funding options available to companies. Business loans are the most popular source of funding, but there are different types of loans that you can choose from, and each has its own set of pros and cons. There are regular bank loans, microloans, private loans from family and friends, and even loans from online lenders.
There is one funding option, though, that some business owners may not be familiar with. This funding option is not really discussed as frequently as traditional business loans. We’re talking about the line of credit option. A line of credit can benefit your business in a number of ways that a traditional loan cannot.
Business Line of Credit
A line of credit works similar to a credit card. It is revolving credit. This means that you use the amount that you need, and you pay it back. That money then goes back into the available pool of funds. With a traditional business loan, you pay it back and then you’re done. With a line of credit, the funds are always there when you need them.
Businesses most commonly use lines of credit for short-term funding needs. For instance, a company may win a contract with the federal government. It normally takes the government between 60 to 90 days to pay the initial invoice. The company needs to have working capital to cover expenses until the government funds are received. This is one instance where a line of credit would be a huge help to the company. The company could draw funds from the credit line to pay for expenses such as payroll and other operational costs.
If the company has to hire additional employees to complete the work on the contract, it will need working capital to cover the added payroll costs. Once the company is paid by the government, it can repay the line of credit funds. Those funds will then be available the next time the company has a short-term funding need.
A line of credit is also beneficial for seasonal businesses. The business typically has to start preparing for the busy season ahead of time. Therefore, the business may need to purchase inventory and make payments before the revenue starts pouring in. A line of credit can fill that gap. It may also serve as a valuable lifeline to address any emergencies that arise during the slower seasons.
The Benefits of a Business Credit Line
Another way a line of credit can help a business is by providing better repayment options than a traditional bank loan. Compare line of credit lenders to find out their policies. Each lender has its own policy when it comes to repayment of a line of credit. For the most part, the line-of-credit repayment terms tend to be more flexible. Interest is only charged when you withdraw the funds from the line of credit. With a traditional bank loan, interest is charged up front on the total amount of the loan. Also, with a line of credit, you may have a lower interest rate. It is worthwhile to check out different line of credit lender reviews, such as this one from Kabbage, to find out more specific information.
Some lines of credit allow the business to build up a healthy credit score. A lender may offer a special credit builder program that works with all of the major credit bureaus. By raising your credit score, you’ll have access to even more types of business funding down the line.
Best of all, having a line of credit provides the business owner or owners with added peace of mind. When emergencies arise or great opportunities come along, you don’t have to wonder how you will acquire the money to pay for these unforeseen costs.
Based on the lender’s policy, you may be able to withdraw additional funds before you even pay back the funds you’ve already withdrawn. As long as you remain within your limit, your line of credit is always there when you need it. For instance, suppose your company has a $10,000 line of credit. If you withdrew $2,000 last month and another need comes up this month, you can withdraw additional funds. Even though you just withdrew $2,000, you still have $8,000 available. If you have paid back $1,000 of the $2,000 you withdrew, there is now $9,000 available. If you then need another $2,500 for an expense, you can withdraw those funds. This means you’re paying back $3,500 plus the interest charged.
Increasing Your Credit Limit
Making timely payments is an effective way to get your credit limit increased. As you repay the funds you have withdrawn, and you pay them on time, you establish trust with your lender. Also, as your business increases its revenue, it’s important to make your lender aware of the growth. If the lender sees your business growing, they are likely to increase your credit limit. Just remaining in business for a long period of time can make a positive impression on your lender and open up new doors for you. As long as your business demonstrates positive trends and actions like financial growth and timely repayments, you should always feel encouraged to renegotiate with your lender and try to establish more favorable terms.
Remember, a business line of credit is an excellent funding source for meeting short-term needs. As with any type of business funding, though, it’s important to stay on time with the payments and avoid borrowing more than you can afford to pay back. It’s also important to do your homework and compare the credit lines that are available from top lenders. Consider the eligibility requirements, interest rates, and credit limits, and stick with established companies that have a stellar reputation.
If you’re interested in a business line of credit or you’d like to learn more about the top providers, check out our reviews and ratings of the top companies.