If there is anything other than the health of people who have been affected by COVID-19 it’s the business sector. It has thrown many small-business owners into an unexpected financial crisis. In such difficult times, a simple help like business lines of credit can save it from drowning deep in the financial crisis.
A business line of credit can be very helpful in assisting a company in seizing an opportunity or weathering a crisis.
A business credit line allows you to borrow additional money as you repay what you’ve borrowed without having to apply for another line of credit. You can utilize your credit line for as long as your lender allows it if you make at least minimum payments and keep it under your credit limit. It is important to understand the business line of credit requirements before finalizing anything.
Types of the line of credit (LOC):
- Secured business LOC:
Everything requires security these days so does secured business line of credit. To secure this form of a line of credit, the company must pledge certain assets as security.
Now that you must be aware that a line of credit is a short term commitment, to keep your security lenders mostly demand or require assets like inventory and accounts receivables.
- Unsecured business LOC:
This sort of unsecured lines of credit does not require specific assets as collateral, but it will almost certainly require a general lien and personal guarantee. Keep your credit score ready in this scenario. As no specific collateral is required for this form of the credit line, the company will most likely need a stronger credit score as well as a favourable track record to qualify. In addition to the same, it is important to know that the interest rates are likely to be slightly higher, and unsecured credit levels are frequently less.
How does the line of credit works?
When you obtain a business line of credit, you provide your company access to a specific amount of money that it can spend as needed. Any interest costs will be included in a monthly statement that shows the amount of credit used.
As previously stated, your payment and interest are determined by the funds you utilize.
The credit limit becomes available once the debt is paid off, and you can use it whenever you like. Depending on the lender, the repayment schedule for a line of credit will differ. Transaction fees may apply if your company uses the LOC frequently.
Few pro tips to consider on keeping a Line of credit:
- Pay down your balance on a regular basis, and don’t let your average running balance get too close to your credit limit. This will demonstrate to your lender that you understand how to maximize the LOC’s value and flexibility.
- It is not a good idea to use a LOC to offset operating losses because it will make repayment difficult.
- To decide the optimal time to apply for a LOC, think strategically about your capital needs for the year. When a company’s cash flow is good, lenders are more likely to extend a credit line.
What issue are you attempting to resolve?
Determine your genuine goal for obtaining financing before entering into a line of credit. Do you have a well-established business and are looking for the most cost-effective financing? If that’s the case, a line of credit is definitely your best option. Consider alternatives if you have a growing firm and require the most flexibility.
