If you are looking for ways to fund your business, you should understand the available lines of credit and how they differ from one another. Many small business owners prefer a line of credit for financing their businesses. Compared to other types of loans, they are highly flexible and can suit your specific needs. Term loans, on the other hand, offer a massive sum of money upfront and a long repayment period, similar to a monthly installment loan. It is unlike any other line of credit, as it serves more as a reserve pool for funds.
There are 4 important lines of credit available for business owners, and here’s what you need to know.
Traditional Line of Credit
The traditional line of credit works best for proven business owners rather than to new business owners. This line of credit has high credit maximums with low interest rates. To qualify for this loan, you are required to have a high credit score as well as annual reporting. This arrangement often comes from a financial institution that hosts the business account.
Business owners will spend that flexible cash on seasonal expenses such as payroll, insurances, and other operational costs. In many ways, a traditional line of credit acts as a capital cushion for your business. When compared with a term loan of a similar size, the interest rate and closing cost would be much lower.
Short-Term Line of Credit
As compared to a traditional line of credit, a short-term line of credit has a higher interest rate, low credit maximum, and faster turnaround time. A short-term line of credit also has less application requirement than other loans.
Unlike a traditional line of credit, it can be offered by multiple licensed moneylenders and not just banks. The most important thing to note with short-term line of credit is finding out what you require for your situation. They are best suited for short-term needs, such as equipment repairs, payroll or inventory purchases. Borrowers with small annual revenues and poor credit scores are able to qualify for a short-term line of credit.
Equipment-Backed Line of Credit
Another suitable financing option for small business owners is lines of credit backed with collateral. With equipment-backed line of credit, the licensed moneylender will take a look at your future financial prospects rather than at your past. All you need to do is to receive an asset equivalent to the loan you intend to borrow in exchange for funding from a credit lender.
For the requirements of equipment-backed line of credit, they are less strict. Should you default on your payment, the lender will sell off the equipment at a cost that is enough to pay off the loan that you owe. While such an arrangement may look like a risk for the borrower, it is essential to note that nobody borrows a loan intending to default. Thus, you should always keep your balances in check.
Invoice-Backed Line of Credit
Invoice-backed line of credit was made for business owners who require a certain set of money, and the customer may be taking too long to pay for the goods that they bought. Rather than relying on short-term loans or a quick loan, an invoice-backed line of credit may be a good option for you.
The value of your invoice will dictate your credit maximum. There, you will have a chance to run your day-to-day business operation without having to rely on your customers’ payments. That means the bigger the invoice, the more significant the amount you can draw from the line of credit.
Depending on your situation, the available lines of credit suit can help you with different circumstances. Analyse your business and see which of the four financing options is most suitable for your business. Whether you want to expand your business or deal with short-term cash flow problems, a line of credit is always a useful safety net.