Some companies don’t have the capital to immediately purchase inventory or equipment explains Paul Haarman. The good news is that many businesses can benefit from a line of credit.
Here is what you should know Before Getting a Line of Credit for Your Business:
- But a line of credit isn’t a loan, so there aren’t any monthly payments. It’s a revolving source of funds, which works well for business owners who have variable costs and need to constantly purchase inventory or equipment. The downside is that while lines of credit typically have lower interest rates than loans, you’ll still be charged interest every month on the outstanding balance even if you don’t use all your available funds.
- A line of credit provides ongoing access to capital as needed instead of asking for an advance each time you want money. This kind of arrangement can be helpful in certain situations where cash flow may not always meet ongoing expenses such as rent or payroll. A line of credit also makes it easier to manage your financial resources by maximizing your return on capital and avoiding idle cash.
- You’ll need to work with a lender who offers lines of credit for businesses, such as a bank or finance company. You can get prequalified with your lender to determine how much you may be able to qualify for. Then the next step is to create a business line of credit application and contact your lender for more information and the application process. If approved, you’ll sign an agreement with your lender and receive your line of credit in one lump sum — this amount will depend on pre-approved loan amounts and the value of any collateral (i.e., equipment) that’s offered as security against the loan balance.
- A line of credit typically doesn’t have fixed monthly payments like other loans do. Rather, it works like a credit card. You’ll have a maximum limit on the amount you can draw on at any time, so if your business’s cash flow is variable throughout the year, this type of loan may work best for you says Paul Haarman.
- You’ll only be charge interest on the money that’s draw against the line of credit. This makes it easier to manage your monthly expenses since there are no pre-payment penalties or due dates to meet. Some lenders charge both an annual fee and interest rate on outstanding balances during each month. But others don’t include these additional fees in their borrowing rates.
- If you need ongoing access to capital for general business purposes. Without having to make monthly payments, lines of are generally less expensive than loans. Since you can avoid the penalties of pre-payment. However, unlike with a loan there are no fixed monthly payments. Which make it harder to budget for your business expenses if your cash flow frequently varies from month to month.
- If you have a predictable and consistent need for different amounts of money throughout the year. A line of credit may not be ideal. The amount available through this type of loan is “live” only as long as you keep paying the interest on it. As soon as you stop paying interest or once that interest is paid off. You won’t have access to that money anymore. In some cases the lender may try to recoup any outstanding balance. By charging additional fees or asking for more collateral from your business at that time says Paul Haarman.
- This type of loan isn’t always based on your company’s credit score. So you may still qualify for a line of credit. Even if you have bad credit. However, since this type of loan is typically revolving. It can be risky to rely on it as your sole source of business capital. If there are any questions about the health or stability of your business, this might not be the best way to access funds.
- A line of credit is only one option for financing your inventory purchases or equipment costs. You can also consider acquiring financing through an asset-based lender or leasing equipment instead. Each method will come with its own unique advantages and disadvantages. Line-of-credit loans can provide fast access to funds, but they don’t usually offer the fixed monthly payments of traditional loans.
A line of credit is an effective way to access capital for your business says Paul Haarman. This type of loan doesn’t require fixed monthly payments. Which can make it easier to handle your cash flow and budget for your business expenses. If you need ongoing access to capital and sufficient liquidity, a line of credit may work best for your business.