Every new entrepreneur thinks about cash flow and how to keep their business afloat. In times of uncertainty, this can be a massive challenge, especially in volatile industries and markets. At times like this, an entrepreneur might consider getting a small loan or an injection of cash to keep their business going. When you need access to cash quickly, a line of credit can be an ideal solution.
What Is a Small Business Line of Credit?
A small business line of credit is quite different from a small business loan. A line of credit provides access to cash in a rolling arrangement. This means a business can keep borrowing and repaying the cash forwarded to them, as long as they pay on time and do not exceed their credit limit. A business loan, on the other hand, must be repaid at the end of a pre-determined period. Business loans cannot be reborrowed before the full amount is repaid but lines of credit can. The similarity between these two types of credits is that the amount borrowed is subject to an interest rate.
A small business line of credit can be used to cater for any business expenses including inventory, payroll, and other overhead and fixed costs.
If you are considering getting a small business line of credit, know that it is subject to a credit review as well as an annual review. Also, interest begins accumulating as soon as you withdraw funds for the first time.
How to Use a Small Business Line of Credit
The main reason entrepreneurs request a line of credit is to get short-term funding. These entrepreneurs use these funds for operational and fixed expenses. Entrepreneurs who run cyclical businesses that have off-seasons can benefit massively from these lines of credit.
Because lines of credit are not assigned a specific use, they can be used to manage cash flow problems and help stabilize a business if its ability to make money is impacted by one thing or another. Women entrepreneurs who are looking for a business line of credit can draw funds using a small business credit card, business checking account, or a mobile app.
Secured and Unsecured Lines of Credit
Many lenders offer their business lines of credit as unsecured loans which makes this an excellent option for entrepreneurs who do not have collateral to put up. Many of these unsecured lines of credit have a variable interest rate and are usually available up to $100,000.
For amounts greater than this, you might need to provide collateral against the amount borrowed.
Qualifying for a Business Line of Credit
Most lenders require that your business has a strong revenue stream as well as a few years of history. To apply, you need to provide personal and business tax returns, financial statements, bank account information, profit-and-loss statements, and a balance sheet.
If you run an online business, you might have it easier getting a line of credit, but your interest rate might be much higher than everyone else’s.
Getting a business line of credit can save your business as it can give it the infusion of cash it needs to survive periods of low cash flow. Ensure that the line of credit you get does not come with a huge interest rate so that you can pay it back easily.