If you’re in need of access to money “on demand” with low monthly payments and flexibility to invest in opportunities and run operations, you may want to consider a business line of credit (LOC).
A line of credit may help equip an entrepreneur with the flexible funds needed to stabilize and grow their business. An LOC may provide the capital you need, when you need it. A big plus for business owners is that with an LOC, you typically only pay for the money you use.
Here’s some information to consider regarding this flexible funding option.
A traditional business loan is a lump sum of borrowed money, but an LOC is a revolving line you can draw against as you need it, similar to a business credit card. This means that you only pay interest for the money that you use. Typically, an LOC may be extended by a large traditional bank, a small local bank, or an online lender.
Generally, the first step is to determine how you will use the funds and how much money you need to access. With this information, you may adjust your budget accordingly.
Here’s a simple example:
Some lines of credit have a draw period. This is a period of time when you can withdraw and pay back funds. For instance, a 12 month draw period allows you to withdraw money for a period of 12 months. The typical draw period on an LOC from a bank in the SmartBiz® network is for 12 months.
After the 12 month draw period, SmartBiz customers may reapply for an additional 12 month draw period on an LOC, a bank term loan, an SBA loan, or other financing options that our network offers.
When considering an LOC for your business expenses, there are generally a few options. Review your financial statements to determine which type is best for your needs.
Tip: Look at your cash flow and income statement to determine the best fit for your immediate needs. Still not clear on the best option for your business? Check with your accountant or another financial professional to help you make the right decision.
Lines of credit have advantages over regular business loans. The use of funds are generally flexible, there are no set monthly payments, and no interest is charged on the unused money. When you repay a borrowed amount, those funds are typically immediately available again.
The number one reason to use a business line of credit is for short term funding needs like:
Another important benefit of a line of credit? It may help you build solid credit making you more attractive to lenders if you need funding in the future. Your credit report is usually the first thing considered by lenders.
Tip: If you don’t need immediate funds, it may be worth opting for a small business loan with low rates and long terms like an SBA loan.
Unlike a loan, which generally is for a fixed amount for a fixed time with a prearranged repayment schedule, there is much greater flexibility with a line of credit. There are also typically fewer restrictions on the use of funds.
Tip: Consider a line of credit if you need cash fast or want to strengthen your credit profile.
A business line of credit isn't like a term loan, but lenders consider similar information to qualify like your credit score, time in business, and revenue.
To qualify for a line of credit from $25,000 to $150,000 from a bank in the SmartBiz network, you'll need at least two years in business and $100,000 in annual revenue.
Although some lenders don't set a minimum credit score, borrowers will most likely need a score of 660 or higher to qualify.
If the time isn’t right to apply for an SBA loan or a bank term loan, a line of credit typically offers access to fast cash and flexibility as well as the opportunity to build your credit. Each business is unique, and each situation is different.
If you’ve determined that an LOC is the right fit, learn more or apply today.