Boost cash flow with a business line of credit
Business lines of credit
- Revolving loans let you tap into funds as you need them.
- Interest rates are typically lower than credit card or term loans.
- Typically have no fixed payment schedule.
- Intended as short-term capital sources.
- New businesses may need to put up collateral.
Even companies with the best business plans and financial fundamentals can run into cash shortages that pose a threat to their ability to meet payroll and expenses. For those temporary problems, business lines of credit are an invaluable tool.
Lines of credit provide businesses, especially startups, with the working capital necessary to keep a business operating in the event of temporary shortfalls, or they can help companies take advantage of fast-developing deals that might improve future business prospects. In addition to cash, they give business owners some peace of mind.
The loans differ from term loans that you might obtain to fund a commercial mortgage or buy equipment. They're not unlike personal lines of credit that you obtain through a home equity loan, or a credit card. The line-of-credit agreement gives you access to a set amount of money to operate your business, although you're not obligated to use the entire amount.
Lines of credit are referred to as "revolving" loans, meaning you can dip into the funds as you need them. If your line of credit totals $100,000, for instance, you can tap into funds when you need them until you've borrowed $100,000. As you pay back the loan, the revolving-credit fund is replenished.
Lines of credit work best when they are used for short-term financing needs. If you have cash-flow difficulties, unexpected expenses, or delays in collecting accounts receivable, the line of credit can be an invaluable method for making sure your bills are paid on time. They help businesses meet day-to-day inventory expenses, or to prepare for a particularly busy season, but are not ideal for funding the expansion of a business or for purchasing equipment.
Although business lines of credit are something like corporate credit cards, they have much lower interest rates than credit cards, or even term loans. The terms of the line of credit will vary depending on your lending institution, but they usually come with no fixed payment schedule and adjustable interest rates. Usually, there's no penalty for paying off a line of credit early, but there can be interest-rate hikes that take effect if you fall behind on payments.
Like other forms of credit, the better your financial standing and the longer you've been in business, the easier it will be to negotiate good terms for your business line of credit. The best deal is an unsecured loan, meaning you don't have to put up collateral in the form of inventory, equipment, real estate or personal funds. Owners of new businesses are often able to secure business lines of credit based on their own good personal credit history.
If you can't land an unsecured line of credit, you can put up property or equity in property, as well as cash, to secure the loan. Depending on the terms you negotiate, if you put up cash, but are able to maintain the loan successfully over a period of time established by the bank, the cash collateral can be returned and the line of credit can be converted to an unsecured loan.