A business line of credit (LOC) has come out as a valuable financial option for small businesses. Considering a credit line in the strategic approach of funding a business can make sure that it has ready access to the most vital resources to meet the requirement of day-to-day working capital and other short-term financial necessities. According to Charles Spinelli, an increasing number of businesses have started using line of credit as a handy gateway to access short-term as well as long-term financing to thrive continually.
What Is a Business Line of Credit?
A business line of credit is a type of revolving loan that provides access to a pre-determined amount of capital, which a business can use when in need to fulfill its short-term financial needs. Precisely, it is among the most popular tools a businessperson can employ to meet its short-term working capital needs, including:
- Buying inventory
- Funding a promotional campaign
- Having greater cash flow during the peak season
- Repairing most essential business equipment
- And More
Types of LOCs
There are two types of credit lines as stated below
Secured Business LOC
As its name implies, this type of LOC needs a business to collateralize any asset to secure the necessary funds. Given that it carries a short-term liability, typically lenders seek short-term assets, like inventory, accounts receivable, etc. in case the borrower fails to repay the credit, the lender will sell the collateral to recover the fund.
Unsecured Business LOC
The reason that has made unsecured LOC a popular choice is that it does not demand any kind of collateral, however, the borrower should have a very strong credit score and persuasive credit profile. In other words, the credit score helps the lender to determine the creditworthiness of the borrower. Compared to secured ones, this type of LOC comes with a slightly higher interest rate.
How Does It Work?
On applying and approval of a business credit line, the business gets access to a pre-decided amount of credit to use as necessary. A monthly statement showing the total amount used as credit and a minimum due including the interest charges is sent to the borrower.
Noteworthy, the interest is charged only on the funds a business uses. Simply by paying the minimum due, the credit can be repaid. And, once repaid, again the credit limit becomes available and can be used as needed. The schedule of periodic payments to repay a LOC typically varies from lender to lender. In general, the payment schedule may be monthly, bi-weekly, or weekly. Apart from the interest charges, the borrower is also asked to pay an annual fee. If any business frequently accesses the LOC, transaction fees may also apply.
According to Charles Spinelli, LOCs under $100,000 can work like any credit card account. Ranging from commercial banks of all sizes, different financial institutions and private lenders offer business line of credit as their financial services.
When Should an Entrepreneur Consider LOC?
Business especially startups and SMEs that regularly requires hassle-free access to funds for meeting their short-term business purposes and having consistent fund flow should make sure to apply for LOC right away.