3 Things To Consider When Taking Out a Business Line of Credit
The need for cash frequently arises in a small business environment. Lines of credit can be an excellent way to ensure reliable cash flow, and have funds to draw upon when the need arises. Of course, using a line of credit for your business comes with a host of considerations, and it’s important to fully understand the terms of any credit line prior to incorporating it into your company’s fiscal strategy.
- Consider Your Primary Cash Needs
If you are seeking a sizable sum of money for a large and defined purpose — say, a business expansion — you may be better off with a term loan. A business term loan will lend you all the funds up front, which you will be required to pay back over time, by adhering to a set repayment schedule. For a hefty and clearly-defined purpose, a term loan may make more sense.
Lines of credit, on the other hand, tend to be more useful when covering shorter-term cash needs. If you have a regular need to purchase additional supplies or inventory, cover payroll, or simply account for seasonal variations in business, a line of credit can be quite useful.
They can also be immeasurably helpful as a backup in case of emergencies, allowing you to draw needed funds in such situations.
- Compare Secured Vs. Unsecured Lines of Credit
A secured line will be backed by some form of collateral — real estate, inventory, equipment, or something else — while an unsecured line will not. Because the former is less risky for your lender, you may be able to get a better interest rate and higher cash limit.
Unsecured lines may only be available if you match certain lending criteria. However, if you do qualify, you will not have to put up collateral, protecting your own assets in the event that you default.
- Ensure a Strong Personal Financial History
You’re most likely to access a favorable line of credit if you have a solid financial history. Likely, this will mean a high credit score, and an established business history.
In the event you don’t meet these criteria, a line of credit can still be useful — you just may be forced to pay higher rates or fees. In such situations, it may be worth improving your fiscal situation — by building credit, and re-applying sometime in the future — to make a credit line more sustainable.
Ultimately, a line of credit can be an asset for many small business. Reviewing your own needs and fiscal situation will help you determine whether one is right for you.