In fact, for many companies this is definitely the best route. A line of credit often offers the necessary capital to act on an opportunity or pay professionals for expansion while also offering a much better versatility that can react to the specific needs of a company at the time. Yet, many times when dealing with banks, credit unions, companies don’t realize that a line of credit is an option and pursue much less reliable and more costly options instead.
How Does a Business Line of Credit Work?
A business line of credit (LOC) is considered a revolving loan. That is a certain top end limit is agreed upon, let’s say $50,000 for an example, and that amount is always available to the business when you need it. Interest accrues only on the amount of money being actively borrowed against that limit.
So in the example of a $50,000 LOC if the business takes $20,000 to make purchases, that $20K accrues interest while the other $30K that’s still available does not. It just stays there available for when it is actually needed. This gives the business the best of both worlds: the money they need at any given time for investment while not having to pay money on the entire amount as you would for a loan.
In a way a LOC acts in a very similar manner to a very low-interest credit card, just with much, much lower interest rates.
Surprisingly Easy to Qualify For:
Many banks are very open to business lines of credit, seeing them as excellent tools that not only help out their business customers but also being a funding option that has a degree of safety for both parties. As such most banks have internal requirements for total revenue or sales in the past 12 to 24 months and minimum business credit score, however these actually tend to be relatively reasonable.
There are many companies that might struggle to get a business loan of size that would qualify for a decent line of credit. They might also find out that the additional flexibility is actually a positive compared to what a more traditional loan would have offered.
The Right Funding Option for Your Business?
Is a business line of credit the right option for your business? While each case is going to be different, in many cases the line of credit is absolutely the way to go. It offers versatility, the safety net of not getting charged interest until the money is actually being used, and the rates are extremely comparable to those of a loan. Add in the fact that there’s never money “just sitting there” being charged interest and it’s easy to see why this is becoming such a popular option among business owners who are realizing that a line of credit might be the perfect gift for them!
