A line of credit is like having a loan on tap: you withdraw money as you need it, up to a certain amount agreed to by your lender. If you know you will need some extra money over time to run or expand your business, a business credit line may be the perfect solution.
Lenders typically reserve business credit lines for businesses that have a proven track record. Credit lines may be secured or unsecured, and they usually require you to pay a minimal annual fee to cover administration costs. Many business owners prefer business lines of credit over loans. Here are some of the advantages of opening a business credit line.
1. Lower interest rate than credit cards. While rates for credit lines are generally higher than conventional bank loans, they are still lower than credit card rates. Read more on Credit Lines vs. Credit Cards.
2. Improved cash-flow management. A credit line can help you even out cash flow when fluctuations are predictable, seasonal, or industry-specific. For example, if you routinely purchase inventory that you won’t sell for several months, a line of credit can be a great option.
3. Make purchases too large for a credit card and too small for a loan. There may be times when you need to buy supplies or inventory that are too expensive to put on a credit card — either the total exceeds the limit or the interest rate is too high — but not high enough to warrant taking out a conventional loan. A credit line can cover these costs as long as you do not exceed the maximum amount and pay off the balance within the designated timeframe. A business line of credit is not recommended to finance property or major equipment or to pay employees. A business loan with a longer repayment period and lower interest rate is a better option.
4. Emergency funds. A line of credit is a good buffer in tough times. But use it wisely; a credit line is no solution for extended cash crunches. Prolonged shortages call for a long-term strategy. Read up on Understanding Business Lines of Credit.
5. Ability to repay and borrow again as needed. Unlike a conventional loan, credit lines let you pay off the balance as you go and continue to borrow again when the need arises.