As a small business owner, you know that there are always unexpected expenses. Maybe you need to replace a piece of equipment, or maybe you have to hire an extra employee to meet a sudden surge in demand. Whatever the reason, unexpected expenses can put a strain on your cash flow. That’s where a business line of credit can come in handy.
What is a business line of credit?
A business line of credit is a revolving credit account that allows you to borrow money as needed up to a set limit. Unlike a traditional loan, where you receive a lump sum of money and then repay it over time, with interest, a business line of credit allows you to borrow money as needed and then repay it over time, with interest.
For example, let’s say you run a small coffee shop. One day, your espresso machine breaks down. You need to replace it immediately, but you don’t have the cash on hand. If you have a business line of credit, you can simply borrow the money you need to replace the machine. You’ll only be charged interest on the money you actually borrow, and you can repay the loan over time.
Check out our other articles in this series: What is a Commercial Real Estate Loan | The Lowdown on SBA Loans
How Does It Work?
When you apply for a business line of credit, the lender will assess your creditworthiness and then issue you a credit limit. You can then borrow money up to your credit limit, and you will only be charged interest on the money that you actually borrow.
Once you have borrowed money, you can repay it at any time. You will typically have a grace period of 30 days before you start accruing interest. After the grace period, you will be charged interest on the outstanding balance until you repay the loan in full.
The Pros
- Flexibility: gives you the flexibility to borrow money as needed. This can be helpful if you have unexpected expenses or if you need to make a capital investment.
- Convenience: is a revolving credit account, which means that you can borrow and repay money as needed. This can be more convenient than a traditional loan, where you have to apply for a new loan each time you need money.
- Competitive interest rates: typically have competitive interest rates. This can save you money on your financing costs.
- Builds your credit history: When you repay it, you are building your credit history. This can make it easier to qualify for other forms of financing in the future.
The Cons
- Interest charges: You will be charged interest on the money that you borrow. The interest rate will vary depending on the lender and your creditworthiness.
- Late fees: If you miss a payment, you may be charged a late fee. Late fees can add up quickly, so it is important to make your payments on time.
- Penalties for early repayment: Some lenders charge a penalty if you repay early. This is something to keep in mind if you are planning to repay your loan early.
How to Get a Business Line of Credit
A business line of credit can be a valuable tool for businesses of all sizes. It can provide you with access to cash when you need it, and it can help you build your credit history. However, it is important to carefully consider the costs and benefits of a business line of credit before you apply. Check out SCORE’s website for some expansion on our list of Pros & Cons above.
Here are some additional tips for getting a business line of credit:
- Get your finances in order before you apply. This means having up-to-date financial statements and tax returns.
- Build your credit history. The better your credit score, the more likely you are to qualify for a business line of credit.
- Shop around for the best interest rate. Interest rates can vary from lender to lender, so it is important to compare rates before you apply.
- Be prepared to provide collateral. Some lenders may require you to provide collateral, such as a business
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