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Every small business experiences times of growth, as well as uneven cash flow. As a result, it is important to understand the inside scoop how to obtain easy access to cash, as well as flexible term loans for repaying borrowed funds. And that’s where an unsecured line of credit comes into play. Also referred to as a revolving line of credit, a business line of credit is a flexible loan option for startups.
While some small business owners believe that a business line of credit is not necessary because their business is profitable, many businesses (with and without cash flow problems) choose to keep a line of credit in the event of unexpected growth or problems.
Simply put, a business credit line is a flexible, low-cost avenue to accessing short-term financing. Similar to small business loans, unsecured lines of credit offer access to money, which business owners can apply to any type of expense that arises. However, unlike small business loans, unsecured lines of credit do not have lump-sum disbursements, which require monthly payments.
Why Obtain a Small Business Line of Credit?
Accessing short-term funding is the main reason to open a business line of credit. Most businesses need these funds to increase inventory or manage operational expenses, such as supplies and expenses. In addition, seasonal businesses often depend on an unsecured line of credit to support working capital during the off-season.
What’s helpful about an unsecured line of credit is that this funding does not need to support a specific purpose. Instead, it is a good funding method for small businesses that need to manage cash flow. Funds are drawn from the line of credit via a business checking account, business credit card, or banking app.
Additionally, a line of credit gives first-time business owners access to a pot of money, which they can borrow from, repay, and borrow from again. This is unlike a loan, where you receive a fixed amount of financing.
How do Secured and Unsecured Lines of Credit Differ?
The major difference between secured and unsecured lines of credit is collateral. Collateral—such as property or other assets owned by the business, such as equipment or inventory—must guarantee secured lines of credit. On the other hand, assets are not required to guarantee unsecured lines of credit. Because it is riskier for lenders, unsecured credit always comes with higher interest rates.
Typically, unsecured lines of credit provide a variable interest rate and are available for sums ranging from $10,000 to $100,000. Amounts greater than $100,000 usually require business owners to secure a line of credit with a blanket lien on all assets or a certificate of deposit.
Does Maintaining a Line of Credit Carry Additional Business Benefits?
Building your business credit rating is one important advantage to maintaining a line of credit in good standing. In fact, opening a modest line of credit and quickly paying off the debt is a good way to build a credit profile.
What are the Advantages of Business Lines of Credit?
Below are several examples when your business can benefit from a business line of credit:
*A line of credit can help during periods of slower sales, especially for seasonal businesses.
*A line of credit is useful when a business needs to cover its business expenses. Some business owners need this when customers take a long time to pay for products or services.
*If you need to purchase equipment or inventory at a reduced cost, business owners can pay with a line of credit, while waiting for cash flow to increase.
How Do Business Owners Obtain a Business Line of Credit?
Applying for a line of credit is not a very difficult task. This can be done through a financial institution such as a bank or credit union, an online lender, a business loan broker, or through an online lender, such as OnDeck and BlueVine.
In order to qualify for a line of credit, most business owners need to own a business for at least six months and have $25,000 in annual revenue. Larger lines of credit sometimes require collateral, which can be seized by the lender if payments are not made.
While some lenders do not set a minimum credit score, most borrowers need a score of 500 or higher to qualify. Interest rates and borrowing limits vary widely, depending on the lender’s requirements and the borrower’s circumstances.
In the application process for a business line of credit, most lenders require documentation, including personal and business tax returns, bank account information, and business financial statements. It is important to note that some online lenders often have less restrictive qualification requirements than banks. But these lenders are also likely to charge higher rates than banks and may have lower credit limits. Lenders typically issue business lines of credit quickly, while banks take longer to develop new lines of credit.
In today’s fast-paced business world, keeping your small business finances running smoothly can be challenging. A small business line of credit may be the simple solution you need to meet your objectives for growth and success.
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