Is your business faced with a cash-flow problem that is expected to be temporary? Do you need to act fast to get access to a revenue-generating opportunity? In both of these situations and others, the business line of credit can offer extra cash necessary.
The main advantage of the business line of credit is that it eases interest charges when you borrow money. That is due to the fact that you just pay interest for the money that is actually utilized.
As a very simple example, let us say that your line of credit is $100,000. If you just draw $35,000 to buy some needed equipment, you only have to pay interest for that amount, exactly what you borrowed. This is true even if you still have $65,000 available in your business line of credit.
While business lines of credit can be really advantageous, you have to be careful with them. You still borrow money. This is why you should know the following.
The Difference Between Unsecured And Secured Business Lines Of Credit
The two options that are almost always available are unsecured and secured business lines of credit. The secured business line of credit is exactly what the term implies.
The line is secured through some assets that the company owns. When you cannot make payments, lenders can assume asset ownership.
If you opt for the unsecured option, there are no assets required to be put up as collateral.
The big advantage of the secured business line of credit is that you will be allowed to borrow a larger amount. At the same time, interest rates are almost always lower.
With the unsecured option, faster funds access is available. This is due to a simpler application process. However, interest rates are higher.
Always Analyze Credit Fees
Most business owners know that they have to look at interest charges but this is not the only thing that has to be considered. There are other fees that have to be taken into account. For instance, you will most likely have to pay transaction fees when money is borrowed. If this is the case and you use the business line of credit several times, the fees will add up over the duration of one year.
It is also possible that a maintenance fee will be charged for the account. If this is the case, the fee is charged even if the credit line is not utilized. Always read the entire contract and focus on the fees so you do not end up blindsided by the fees.
Interest-Rate Variability
In most cases, a business line of credit has a variable interest rate. This is based on a specific percentage below or above the prime lending rate. When interest rate changes, it can become difficult to repay what you use.
With the credit line, you can so easily borrow money for the business. This can lead to the situation in which you simply take advantage of the credit more than you actually need to. You can easily end up with financial hardship since debt increases.
Insure The Business Line Of Credit
It is usually a good idea to purchase insurance so you can cover your business line of credit. This is because outstanding payments can be covered when something bad happens, like injury, death or illness. Based on credit line size, this is a protection that can easily help you.
Potential Bank Drawdowns
Nowadays, economic uncertainty is high. Due to this, a lending institution can demand the fact that you bay the balance based on specific discretion. This is a really important provision and you need to be very careful with it.
Always think about the things that are included in the contract. When you cannot repay your loan and there is a short notice, the business line of credit will instantly hurt the financial situation of the company.
Evaluating The Very Best Line Of Credit
Countless lending institutions are available for you right now. They offer business lines of credit that can easily vary from one lender to the next. The interest rates will instantly vary so you can stay focused on this as the main consideration. Then, you have to look at borrowing limits so you are sure you can get as much credit as the business actually needs.
The last thing to always consider is what repayment terms you agree with. They can greatly vary, ranging from monthly to weekly. It is vital that you do your homework when you compare business lines of credit.
Conclusions
To sum up, a business line of credit can be really useful for any company but this does not mean that it can be abused. At the end of the day, we still talk about a loan so interest has to be repaid. This means that you have to do your research and you need to learn all that you can about every single opportunity that is available for you. Only make your choice based on research and comparisons.