How Can A Business Line Of Credit Benefit You?
A business line of credit, also known as a revolving line of credit or an operating line of credit is an offering by a bank or merchant of a specified amount of always available credit for an undetermined period of time.
Usually, this business line of credit is used as a means to meet basic day to day expenses such as payroll, purchasing supplies, boosting working capital or acquiring more inventory; along with a host of other benefits. To be able to access an unsecured business line of credit, you will need to prove that your business has a healthy cash flow.
Once the loan is granted, interest accumulates on it and it is capitalized like any other credit. The credit limit may be used over and over again as long as you do not exceed the maximum limit provided. For example, if you are given access to a $50,000 line of credit and you take out $25,000, you can still be able to access the remaining $25,000. If you pay back the $25,000 down to $0, you still have access to the entire $50,000 without the need to reapply.
As a business owner, a business line of credit can be beneficial to you in a number of ways, some of which include:
1. There are no set monthly payments
A business line of credit is a flexible method of borrowing money for your business. It allows you to borrow within a pre-approved limit instead of borrowing a fixed amount all at once, and then make payments on a regular, predetermined schedule. Traditional loans usually require set monthly payments that may pose a challenge to the growth of a start-up business, however, with a business line of credit, you can pay the minimum amount due and borrow again to meet your short-term needs or goals, efficiently utilizing credit as your principal is being repaid.
2. Enables your business to pursue opportunities quickly
With a revolving line of credit, you will be able to safely stay afloat while facing the day to day challenges of running your business. Every problem pertaining to managing the cyclical flow of sales, seasonal changes, and the occasional cash flow shortages will be effectively dealt with so that when opportunities arise, you will be in a better position to pursue them quickly, even when you don’t have the available funds to invest.
3. Serves as an effective cash flow management tool for your business
The primary purpose of a business line of credit is to help finance ongoing operating expenses. Many businesses at one time or the other may experience cash flow challenges and a business line of credit can be a lifesaver in such situations. With this solution, you will be able to take on incremental credit within a predetermined limit and as long as you make your minimum payments and refrain from accumulating too much debt than your business can handle, you will be fine.
4. A business line of credit builds business credit
A major benefit of a business line of credit is that it is a great way to build your business credit. Your business needs to have a good credit rating with the major credit reporting agencies and using a revolving line of credit will enable you to build a positive payment history within a short period of time that will appear on your company’s business credit report. Also, due to your credit-worthiness, you will be able to access future credit facilities for your business.
5. Allows for multi-purpose usage
Unlike traditional loans which are usually given out to be used for a specific purpose, a revolving line of credit, on the other hand, can be used for just about any aspect of business activity. It allows you to decide what you want to spend your cash on for your company and it can be used for multiple purchases.
6. Allows you to focus more on running your business
With the available cash on demand to meet your short-term funding needs which a revolving line of credit provides, you will be able to take your mind off money and focus more on running and growing your business successfully. Also, knowing that funding is readily available when you need it can motivate you to take on bigger projects and set up your business to explore more opportunities.
7. Lower interest rates
Typically, a business line of credit has a lower interest rate and closing costs than a business term loan of comparable size. It is a great way of accessing credit whether you’re a start-up business or a growing company and it can provide a cushion of cash when you need it without having to pay large interest rates, unlike traditional loans. Your interest rate may, however, increase substantially when you’re late with a payment or you go beyond your borrowing limit.