The basic benefits of a business line of credit
If you are a small business owner, money is probably never far from the front of your mind. This is especially true if you operate a business in a field that commonly experiences seasonal or other cyclical shifts in expenses or income that can lead to temporary cash flow issues. Fortunately, funding opportunities are available for situations just like this, and one of the most common is a business line of credit.
Small business loans are great tools for entrepreneurs, but they may not be the best option for businesses with fluctuating cash needs. Once you have the loan, it’s yours, whether or not the amount you need changes. A line of credit, on the other hand, is a well of funds with a set limit that is available for you to tap into as needed, within the specified guidelines. You don’t have to take out more than you need, and you can typically repay as early as you like.
These things make a line of credit a good option for businesses that experience seasonal changes or other temporary business fluctuations. Examples of businesses like this are those that depend on the weather or tourism.
Another common reason businesses seek a line of credit is to support large income/expense cycles, such as when inventory needs to be purchased in large amounts all at once. Although the income will come in steadily if you have a solid business plan and carefully managed cash flow, you may not have enough up front when it comes time to buy inventory. While a loan can also be used to purchase inventory, if you need the money for only a short time before the income from sales adds up, then a line of credit could be a better option.
“A line of credit is a standard service provided by many [financial institutions] that serve small businesses,” says Scott Allen, the entrepreneurs expert at About.com. “Getting the loan approved depends on the business’s ability to repay and/or the personal assets of the owner—for example, a second mortgage on a home, assignment of stocks and bonds, or assignment of the cash value of life insurance policies. [Financial institutions] will extend a secured line of credit to most start-up ventures.”
If you can demonstrate consistent earnings and many forms of income that you could use to repay the line of credit, you may receive an unsecured, rather than a secured, line of credit. Financial institutions know that even with a steady income, sometimes business owners just need more cash.
“For business owners, getting unsecured business lines of credit is by far the best choice for having that cash on demand,” says Marco Carbajo, guest blogger for the U.S. Small Business Administration (SBA). “The fact is that business owners want access to funds—whenever they need it, at a competitive rate and with flexible payment options.”
Generally speaking, when a financial institution gives you a line of credit, there will be a set maximum amount, and you can draw up to that amount as needed. You can repay the money and then borrow again while the line of credit is still active. The financial institution, when you first set up the line of credit, will set the amount of time the line will remain open. You will also discuss how to guarantee or secure repayment to arrive at an agreement that the financial institution is comfortable with and that meets your business needs. Stop by today to find out more.
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