Financing Your Business With a Line of Credit
Types of business lines of credit
There are five main kinds of business lines of credit. Each has different terms and characteristics:
1. Revolving line of credit. This is one of the most common types of credit lines. Your business is approved for a set amount. There is a loan term of anywhere between one year and even as much as 20 years. You are approved for a certain amount, and you can draw on those funds when you need them. You make payments on your loan at you will (although there is usually a monthly minimum to meet), and as long as you free up space in your business line of credit, you can keep accessing it without applying for a new loan.
2. Asset based line of credit. This is essentially a type of revolving business line of credit. However, instead of being unsecured, it is secured with some sort of an asset. This asset could be accounts receivables, outstanding invoices, inventory of the business or one of the company’s buildings. You receive an approved amount based on your credit score and upon the worth of the assets you submit for consideration. The interest rate on an asset based business line of credit is usually between one and three points lower than on an unsecured line.
3. Demand line of credit. This is not a popular type of financing for many businesses. This is because the loan made by the bank is payable on demand. You can access the line as you wish – up to the approved amount – but you have to pay the loan when it is called due. There may not be a set term or repayment schedule, so this can be very stressful for a business owner.
4. Cleanup line of credit. Every so often, with this business line of credit, the company has to make sure the balance is zero and than keep it there for a certain number of days out of the year (30 days is rather common). But the line remains open, and no application for a new loan is required when you need more money.
5. Draws payable. This type of line of credit does not require re-application, but it does require that each disbursement of funds be paid off within a certain amount of time.
Advantages of a business line of credit
The fact of the matter is that you are not always going to have the cash you need on hand to cover all of your expenses. You will have times when you are waiting for one or two invoices to be paid, but you still need to pay personnel, make payments to your own suppliers and cover overhead costs. Having a business line of credit available to draw upon in such times is very useful. It eases the cash flow situation and helps you keep your business moving.
Another advantage to a business line of credit is that you do not have to keep applying for loans. Once a line of credit is open, it remains so. You can turn to it and get a disbursement when you need it (as long as you do not exceed your approved amount), without having to apply for a loan each time. This is convenient, since it can take days – and even weeks – to get approved for a business loan. Once you are approved the one time, you can access your line of credit again and again as long as you make payments to keep the funds available. But you can make the payments when your invoices have been paid.
Applying for a business line of credit
You should realize that when you apply for a business line of credit, your credit report will be checked. You company’s credit history will also be checked. You will need to have good scores and be considered low risk in order to qualify. You should also be prepared to present your plan for becoming a successful business. This will show the lender that you are likely to make your payments.
A business line of credit can be very helpful and convenient. It helps you keep your cash flow moving in such a way as to ensure that your business can keep growing.