Business line of credit is very important for those people who wish to start a new business because it helps them in making transactions which are essential for the business to grow. It is offered by many banks and can be used at any time for business purposes. However, the limit of the amount cannot exceed the number which was earlier decided between you and the bank, at the time of signing the agreement. Business lines of credit are preferred over business loans by many businessmen due to the various advantages associated with them. You may not need any collateral, if your previous credit history is good and up to the mark. If you opt for a business line of credit, you will have to pay the bank, the annual fee for the service provided. How much amount you get depends on your business model, past performance and your ability to repay.
Business line of credit helps new entrepreneurs at the most crucial stage of their business, when the inflow of money is less than the outflow in the initial stages of the business development. It will help you achieve your money or capital needs in the short term as and when the need arises. Many businesses collapse within a few months of starting due to cash flow problems which business line of credit can help to overcome. A major advantage is that it allows you to purchase your equipment, machinery and raw material for business related purposes by anticipating your sales and turnover in the future based on your current performance. You are expected to complete the cycle of using the credit money, paying it back and then using it again to take your business to the desired level.
Business lines of credit are more preferred than the credit card facilities provided by most of the banks. The primary reason for this is that the credit card service providers charge more interest than that applicable for the business line of credit. The business line of credit helps you to deal with the fluctuations in the market which are very common. In your business, there are situations when you have to make huge purchases, by seeing the profit which you can earn by doing so. Using it to make these heavy purchases is more advisable because the amount involved may well surpass your credit card limit and also, the high interest rates charged will make it very difficult for you to repay. In times of emergency, the business line of credit is a good way to deal with the complications in the business.
In some business lines of credit, you will have to make only interest payments to reduce the burden of payments while your business is still growing. Once your finances are set right, you can opt to pay both the principal and interest amount to the bank to complete your liabilities before the date of maturity to avoid penalty. You also have the choice of converting it into a term loan, if the interest rates are increasing continuously. However, if the interest rates go down in a certain period of time, then the term loans can be converted back to business line of credit. Note that a business line of credit should not be used for the payment of salaries to employees.
Tips to Obtain a Business Line of Credit
- Have a good previous credit history
- Issue personal guarantee of repayment
- Arrange for personal collateral, if business is new
- Produce all necessary documents
- Be ready for collateralization of loan from all principals, in case of partnership business