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When you find that your operating expenses are increasing and funds are running low, you may need quick access to cash. In this case, you might consider a business line of credit, which offers several advantages over other forms of financing.
With a business line of credit loan, you can use a revolving line of credit to pay for any business expenses or ongoing costs.
Find out how a line of credit business loan works, if it's right for your business, and compare your options now.
A business line of credit is different to a traditional business loan. Instead of receiving the loan amount as an up-front lump sum payment, you are approved for a specific credit limit, which you can then access as you wish.
You'll only be responsible for paying back the funds you actually use, plus any other fees charged by the lender. Moreover, your lender will only charge you interest on the amount borrowed, not the entire amount you're approved for. In this way, a line of credit loan functions more like a credit card than a normal business loan, but generally offers a lower rate than a traditional credit card.
Depending on the lender, you may also be required to put up collateral as security for your line of credit, although many lenders also offer unsecured line of credit loans.
A business line of credit can give you greater control and flexibility over your funds, as you're able to borrow only what you need and pay back the facility at your own pace. This added flexibility is what makes a business line of credit valuable and practical for business owners.
A business line of credit is a flexible and popular loan option for businesses of all sizes, but it's important to know if it's the best choice for you. Consider the following to help determine if a business line of credit, or a traditional business loan, is suitable for your business:
You need ongoing access to funding, such as to help manage cash flow, or in case of unexpected costs or expenses. A business line of credit is better to suited to businesses that need intermittent or occasional access to additional funding, but are in the position to repay the funds quickly. The interest rate on a line of credit is generally higher than on a normal business loan, and you will be expected to repay the funds on a short-term, often monthly, basis, not over the course of a longer loan term, like with a business loan.
You need to make an immediate or expensive purchase, such as new equipment, property or investment. If you're planning a major purchase or expense in the near future, a business loan may be a better option. You will be given the full loan amount up-front, which can then be used to cover the purchase or expense, and then have an agreed loan term over which you repay the cost of the loan.
It may be easier to budget for and manage the regular repayments of a business loan than it is with a business line of credit loan.
Keep in mind the following factors when comparing your options to find the line of credit loan that is right for your business:
If a business line of credit doesn't sound suitable for your business, there's a number of other financing options you can compare. These include:
Lenders usually charge an annual fee, transaction fees and interest. However, ongoing costs associated with a business line of credit differ from lender to lender.
Make sure to have on-hand your identification, proof of income, business financial statements and other personal- and business-specific information such as address, ABN, how long you've been in business, etc.
There's usually no limit. Most often, it would be valid as long as you hold the original credit account.
An overdraft can be added to a personal or business banking account and lets the customer access additional funds (up to an approved limit) once the account has run out of funds. Depending on the lender and type of account, you may be charged overdraft fees, or may have to pay interest on the overdraft amount used. In contrast, a line of credit is available to be used at any time, and is accessed separately to an existing banking account.
Image: Shutterstock
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