Especially small and medium businesses consistently seek easy access to funds for operating their functions since most of them strive with a lack of working capital which is often considered as the lifeblood of business. A poor cash flow for a sustained period is likely to affect the bottom line of the business while making it challenging to cover vital expenses or pay bills. In the opinion of Charles Spinelli, to avoid such a situation, a great solution for SMEs is opting for a business line of credit. It has emerged as a great tool that helps optimize cash flow and leverage the advantages of upcoming opportunities.
Understanding Business Line of Credit
A business line of credit refers to a predetermined loan amount or funding that businesses can borrow from different financial institutions or banks when they require funds and pay back in the future. What makes a line of credit unique from a term or traditional loan lies in its ‘revolving’ nature.
This means it allows businesses to use the funds up to the approved limit and then pay back to the tune of what is used while making the funds available again for the borrower. Moreover, there is no restriction that a line of credit needs to be used only for buying a business machine, thus allowing businesses to use it for different purposes associated with the business. For instance
- For accessing unrepresented markets and market campaigning;
- Paying salaries and wages of staff
- Buying business inventory
- Making supplies for a huge order
- Hiring new employees
Key Advantages Of Business Line Of Credit
Flexible access: the primary advantage of a business line of credit is the flexibility of the funding option. Once approved, a business can draw funds whenever it requires funds and pay that portion fully or partly, it has availed. Again the funds will be available for the business.
Pay Interest only on the used funds: The next appealing benefit of the option is it does not need to pay interest on the unused part of funds however, only on the portion of credit that is used.
Higher credit rating: Using the line of credit sensibly and repaying dues timely can be a fantastic way to build the credit rating of a business. This increases the likelihood of availing traditional or term loans for business purposes.
Secured and Unsecured Credit Lines
A line of credit is categorized as a secured line and an unsecured line. Here’s how they differ.
A secured line of credit: As the name says, in a secured line of credit, typically the borrower is asked to pledge any of their assets such as inventory as collateral against funding.
Unsecured line of credit: The unsecured line of credit is the most popular option because, for this, the borrower is not required to collateralize anything. However, to get approval, businesses need to establish their credibility backed by a good credit rating, appealing credit background, etc. Also, unsecured lines of credit offer lower credit limits and charge higher interest rates.
Things That Are Required For Getting the Loan
According to Charles Spinelli, businesses looking for a new business line of credit should keep the following things handy before approaching the bank or financial institutions for the funding option.
Collateral: if opting for a secured line of credit, one should be prepared to pledge or mortgage some kind of asset like inventory, equipment, etc.
Business Financial Statements: most lender before approval of the loan like to know -how many years the business has been operating in the market and their business health to qualify them for a business line of credit. Thus, it makes sense to carry financial statements of the last 2 to 3 years for getting quick approval.
Statement of Credit History: for those who opt for an unsecured line of credit, make sure to carry the credit record for evaluation by the bank before allowing the fund for the business needs.