Every businessman understands the importance of extra cash and fund for unplanned expenses and surviving tough times. Among the varied options of business financing, the business line of credit happens to be a current favorite in the small business arena.
Small businesses do not mostly have the luxury of extensive capital availability. Estimates and surveys show that small businesses have cash reserves that can last for about 27 days. These small businesses engage a major chunk of the private sector and generate a large number of jobs. It can be said that small businesses’ strategy constitutes to be a part of a larger business strategy where their role is generating local jobs and producing essential services and commodities for the native market.
What Is The Business Line Of Credit?
A line of credit is a preset amount that can be borrowed from and paid back later. It can be crucial to sustaining the business in hours of crisis and even snatching opportunities. The best part is you can borrow just the amount that is required and pay interest on the sum that has been lent.
Lines of credit can be used to purchase business commodities like inventory, or for operating expenses. Lines of credit are revolving, meaning that you can utilize the money, up to approved levels, and then repay it to make the funds available again. If you pay the least minimum amount, you can use the line of credit for as long as possible under the terms and conditions of the lender.
Types Of Credit-
A business line of credit is found to be of two types- secured and unsecured. A secured line of credit is the loan that the lender has issued a claim against an asset that belongs to the borrower. It is like collateral, which the lender can forfeit or sell in case of failure of payment. For example, a car loan. As the lender is sure of getting their money back, in one form or other, these lines of credit have lower interest rates and higher credit limits.
An unsecured line of credit, on the other hand, doesn’t involve any collateral. The payments done are fully tax-deductible. Once the borrower pays the amount that has been lent, the amount replenishes itself automatically and is available for usage purposes.
However, such lines of credit are risky for lenders, therefore they charge high-interest rates. Also, getting the lender’s approval for businesses to attain an unsecured line of credit is slightly difficult compared to its secured counterpart.
Advantages of Business Line Of Credit-
- Cash flow- Be it small businesses or large ones, cash flow is not steady throughout the year. Small businesses especially find this credit line handy to pay bills on time and automatic payment discounts. Even for seasonal firms, when the cash flow isn’t quite enough, a credit line can be helpful to sail through tough times, and once the peak season starts, they can repay.
- Seize opportunities- For advertising, extensive marketing, or participating in new ventures isn’t a possibility for small businesses provided the tight budget. A line of credit can help you to grab these opportunities. It isn’t just about filling the gaps but also staying afloat and flexible to pursue new initiatives.
- Maintenance- The seasonal fluctuations make it difficult to understand future cash demands. Businesses just do not need money to pay bills, purchase inventory and provide personalized services. They also need money to maintain existing infrastructure and even revamp them.
Therefore, lines of credit help avoid bumps and uncertainties. They not only bridge cash flow gaps but also ease the problem of late-paying customers and off-season business cycles.