Business Line of Credit
A business line of credit is a facility available to business owners that allows them to borrow cash from a pre-determined amount available for credit instead of borrowing the entire amount as loan. Once the borrowed cash is repaid, the entire amount is available again as line of credit.
For example, if a lender offers $50,000 as business line of credit to a business owner, then if the need arises, the business owner can borrow $10,000 or less or more from the lender (available line of credit) instead of borrowing the entire $50,000 as lump sum loan. After the $10,000 is repaid, the full $50,000 is available as loan again.
Businesses often require immediate cash for varied purposes such as buying capital good, hiring new staff, increasing the range of products, and/or expanding the business. A business line of credit can be very helpful for such purposes.
How to get a business line of credit?
Lenders will check the duration of time that a business owner has been running the company before approving a business line of credit. Some lenders may need the business to have been in operation for over 2 years, while others are happy with just 6 months. Lenders will also pull the personal credit score of the business owner; lending companies generally opt for clients with a credit score of 600 and above. The lenders will furthermore check the recent revenue of the business. The revenue aspect is typically dependent on the amount of funds that the business owner is looking to borrow. The amount that can be borrowed can range from $1,900 to $500,000 or more. Lastly, the lenders will verify the accounts receivable of the business and check the type of physical assets that the business has.
After ascertaining the eligibility of the business, lenders calculate the amount of money that can be made available as business line of credit to that company. To do this, they first calculate the liquidity ratio or the current ratio of the business. It is the probability of the business to repay the long and short-term debts. Businesses with increased current ratio have a better chance of getting approved for a higher business line of credit amount, good repayment terms, and better rates of interest.
Advantages and Disadvantages of Business Line of Credit
The benefits of business line of credit are:
- Businesses have ready access to funds whenever needed
- It is one of the best options for growing the business
- Companies need to pay interest only on the amount that is borrowed
- Applicants with low credit score also stand a chance to get approved for line of credit
- The money can be used for many different business purposes
The cons of business line of credit are:
- Lenders may need personal guarantee
- Applicants with low credit may be charged a higher interest rate
- Personal credit is checked and used for approval of business line of credit
- Lenders may ask for the latest documents whenever funds are withdrawn
- Lenders may require collateral for securing a line of credit.
Shop around and compare the offers of different lending companies before selecting one. Ensure that you are fine with the terms of the lender before signing up for the business line of credit. Understanding the fees, interest rates, etc., will help make sure that the business line of credit is cost efficient and good for the company.