When it comes to borrowing money, businesses have several great options. From personal investments and commercial loans to equity financing and government programs, each of these funding options offer their own unique set of benefits. One of the most popular ways to borrow is through a business line of credit. A business line of credit is a revolving credit line that gives businesses the ability to access funds when needed and repay over time. Interest is only paid on the portion of money borrowed.
Importance of Business Lines of Credit
There are many reasons why your business can benefit from a business line of credit, even if your company does not necessarily need a credit line to continue operations. Having access to a business line of credit can help your company remain in control of your cash flow throughout the year. In addition, there is no lump-sum disbursement made at the opening of the account opening like with a traditional business loan, meaning you will not be stuck paying subsequent monthly payments if you do not use your credit line right away.
Benefits of Business Lines of Credit
1. Improve Business Credit
Similar to how you build personal credit, businesses too need to establish credit ratings with the major business credit reporting agencies. Without ample credit, your business may not be eligible for alternative funding down the road, such as a small business loan. The best way to maintain a good credit score is by establishing a positive credit history with a business line of credit. As you continue to make your payments on time and keep a low account balance, you will likely see your credit score go up. You also have the advantage of boosting your company’s creditworthiness in the eyes of business lenders.
2. Set Flexible Payment Terms
With traditional business loans, you are forced to pay back a set monthly amount no matter how much of the loan money you spend that month. This can present a financial challenge to new businesses that may lack the funds needed to steadily grow. With a revolving business line of credit, businesses can set more flexible repayment terms that work better for their unique budget. In addition, businesses have the option to pay the minimum amount due if they have a slower month, unlike a term loan which requires a significantly higher set payment.
3. Maintain Control of Capital
With business lines of credit, companies can maintain greater control of their capital. Instead of receiving a lump sum of money to be repaid at a variable or fixed interest rate like a traditional loan, business lines of credit allow you to tap into your funds as you need them. With more control over your money, you can choose exactly how much money you want to take from your line and when you take it. Essentially, companies have more freedom to make important decisions that affect their growth.
4. Keep Business Expenses Separate
As you are growing your business, it can be tough to keep personal and business expenses separate. You may find it necessary to use your business cash for personal expenses and vise-versa. Having a business line of credit makes it easier to separate your personal expenses from your business expenses. The revolving line of credit is dedicated solely for your business, meaning it is easier to keep track of business costs. Having a separate account for business expenses will also make your company appear more professional in the eyes of partners and other investors.
5. Get Access to Lower Rates
Unsecured business lines of credits generally follow the prime lending rate. Prime refers to the rate set by a bank, which are subject to change at any time. Generally, a prime lending rate is considerably lower than the interest rate of a standard credit card. When you make payments on time consistently, you can expect your rate to remain relatively low. However, if you miss payments or pay less than the agreed upon amount, your debt will grow which can limit your access to your business line of credit.
Learn More About Business Lines of Credit
Acquiring a business line of credit can be a safe and affordable way for businesses to secure short-term financing. Most lenders tend to be lenient when determining if a business qualifies for these business banking products. Even startup companies will often qualify. What makes a business line of credit so popular is its ease of use. The revolving capital works similar to a credit card. The main differences between the two are that a line of credit offers instant access to cash and in many cases, lower APRs. For more information about business lines of credit or how to acquire a line, contact a banker at FVCbank.