A business line of credit is a type of business loan. Instead of taking out a loan for $50,000, you take out a line of credit with a capped amount like $50,000. You then get to withdraw the funds you need up to that maximum as you need it. These popular business loans offer a number of benefits. Let’s look at five reasons to consider applying for a line of credit relative to other types of business loans.
The Right Sized Loan
Lines of credit let you charge items that are too expensive for a credit card, but aren’t big enough to warrant their own loan. For example, you may apply for a loan for $30,000 for new delivery vans, but few institutions will give you a smaller loan of $3,000 to repair a damaged van. Yet this amount is too much to put on a credit card.
Lower Monthly Payments
The monthly payment on the balance is based on what you owe that month, so the payments are lower on a $50,000 line of credit against which you’ve borrowed $20,000 than if you took out a $50,000 loan and put the $30,000 you haven’t spent in a savings account until you need it. And a business line of credit always has a lower interest rate than credit cards, whether personal credit cards or business credit cards. Business lines of credit also give you a much lower overall payment than the high cost of short term bridge loans when you are facing a cash crunch. And during certain periods, only interest payments are due on the loan balance.
When you apply for a business line of credit secured by the equity in your business property, you’ll also see lower interest rates than other types of loans because the debt is secured by the real estate. But these loans close much faster than if you were taking out a mortgage.
If you have taken out a business equity line of credit for $20,000 and been paying the monthly payments on time and in full for several months, it is a much easier process to get the line of credit amount increased than it is to take out an entirely separate loan. You’ll enjoy the convenience of only having to pay one monthly payment instead of keeping track of multiple loans. You will be able to make aggressive principal payments in good months and borrow against the line of credit when you face a surprise cash crunch. This flexibility significantly improves your cash flow management.
A business line of credit also lets you finance multiple purchases of hundreds or thousands of dollars with a single institution instead of trying to arrange vendor financing for everything from inventory to equipment. The other benefit is the fact that the business line of credit isn’t secured by these items, so unlike a car payment or equipment payment, you don’t risk having critical assets repossessed when you can least afford to lose them. Lenders, though, suggest using a mortgage instead of a line of credit to buy real estate, since the mortgage will come at a lower interest rate than the line of credit would offer.
If you are considering borrowing against a line of credit to make payroll, you need to look into other ways of raising major capital because your business is at risk of going under.
Simplified Account Management
We’ve already addressed the benefits of using a line of credit to have a single account to pay each month instead of many separate loans. Another benefit of the business equity line of credit is that it doesn’t require an annual renewal like high limit credit cards. One of the attractions of lines of credit is how easy it is to transfer funds from the line of credit to a business checking account, though most lenders also give you the ability to write a check against the line of credit. This simplifies account management significantly.
Many lenders require a business checking account be set up to be automatically debited when interest only payments are made on the loan. Set this up, and you won’t have to worry about making interest payments as long as you ensure there is enough money in the business checking account.
A major benefit of a business line of credit is that you retain control over how the funds are spent and used. A business equity line of credit lets you tap into the equity of real property you own without having to sell something to raise cash or risk losing control of it if a payment is missed. Nor do you have to sell equity in your business and risk your ability to make decisions quickly in order to raise capital.
A business line of credit gives you flexibility in the loan amount and repayment terms, such as letting you borrow to make multiple purchases individually too small to be financed through loans on their own. Business lines of credit let you maintain control over your business and how the money is spent. Account management is simpler, and the line of credit requires less effort to alter like raising its balance. Monthly payments tend to be lower for equity lines of credit because it is secured by real property, and yet you retain the ability to borrow against it when cash is tight.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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