With a business line of credit, get quick access to cash for your business and gain ultimate control by paying back funds at your own pace.
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, you're able to pay down business expenses by having access to a revolving line of credit that you can use for ongoing expenses or when business emergencies arise.
Although a business line of credit is similar to an overdraft, there are several differences, the main being that an overdraft can only be accessed when your account goes into negative. A line of credit can be accessed whenever you need it.
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How does a line of credit for business work?
A line of credit involves you being approved for a specific credit limit. You are then able to access these funds up to the amount you've been approved for. You'll only be responsible for paying back what you actually borrowed, 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. Depending on the lender, you may also be required to put up collateral as security for your line of credit.
In the end, a business line of credit gives you control since 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. It's also usually cheaper than traditional credit cards.
What features come with a business line of credit?
There are standard features that come with every business line of credit and include:
- Interest rates. Make sure you understand whether your lender charges a variable or fixed interest rate. Also, keep in mind you'll only be charged interest on the amount you actually borrow, not on the amount you're initially approved for.
- Comparison rates. To help you compare options more accurately, the comparison rate takes into account not only a lender's interest rate, but also the other fees that are charged.
- Fees. Usually, a business line of credit includes one-off fees such as application and establishment fees. They also may include other fees such as annual charges, ATM and transaction fees.
- Monthly repayments. Business lines of credit have no minimum monthly repayment as long as any interest, charges and other fees are paid every month.
- Secured vs unsecured. Many business lines of credit may need to be secured, meaning you may be required to put up any business or home equity as collateral for your loan.
- Minimum loan amount. When applying for a business line of credit, keep in mind that some lenders may require a minimum amount to be borrowed.
How to compare your options
Keep in mind the following factors when comparing your options:
- Can my business afford it? This should always be the main factor in your decision. Before taking out any type of debt, make sure to calculate all associated costs and make sure your business's cash flow is able to take on new monthly repayments.
- How much can I borrow? Different lenders offer varying minimum and maximum loan amounts. However, the particular amount you're approved for depends on several factors that may include past credit history, requested loan amount, cash flow, assets and liabilities.
- When will I receive my line of credit? Make sure the lender you choose is able to provide your funds when you need them. Otherwise, you'll be wasting lots of time, resources and money.
- How much will it cost me? Besides the interest rate, check to see what fees you'll be charged, including one-off fees such as application, line and establishment fees. They may also include ongoing fees such as loan service and annual fees.
- How much will my repayments be? Your monthly repayments are not fixed and depend on how much you would like to pay down. As long as you pay interest and other fees for the month, lenders provide great flexibility on how much of the balance you want to pay back.
Things to avoid with a business line of credit
- Borrowing more than you can afford. Especially with business lines of credit, you may easily borrow more than your business requires or can afford. Also, just because you're approved for a certain amount doesn't mean you should use it all. Lastly, never request a loan amount more than what you actually need. By doing this, you can find yourself quickly getting into too much debt and, with it, put your business in financial distress.
- Taking too long to repay. With business lines of credit, you're not required to pay back the amount you borrowed within a fixed period. Rather, you have the option to pay only minimum monthly charges. Whatever balance is left unpaid, interest and charges accrue. This means that the longer you wait to pay back your unpaid balance, the more expensive it gets. Avoid this by paying down your unpaid balance as much as financially possible.
Questions you might still have
What types of ongoing costs are there?
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.
What documents do I need to apply?
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.
How long does a business line of credit last?
There's usually no limit. Most often, it would be valid as long as you hold the original credit account.
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