Adaptability is an essential quality for every business. Hard times are inevitable, and if you want to survive amidst cash flow uncertainty and limited resources, it is critical to employ the right solution. In these particular instances, one of the best financial tools to have is a business line of credit.
A business line of credit: an overview
A business LOC works like a revolving loan that gives a company access to fixed capital. The principle is similar to having a credit card where paying down what you owe frees up more capital for future expenses. A small business line of credit from Become, for instance, is ideal for the following short-term financial requirements:
- Paying for equipment repair
- Cover for cash flow shortage
- Purchase product inventory
- Financing an ad campaign
In general, a business line of credit can be categorized into two types:
- Unsecured business line of credit. An unsecured LOC means the borrower does not need to provide any collateral. Nonetheless, the lender will likely require a personal guarantee or a general lien. To get approved, the borrower needs to have a stellar credit rating as his type of product poses a greater risk for the lender. Moreover, interest rates are possibly higher and the approved credit limit is often lower.
- Secured business line of credit. In contrast to an unsecured LOC, a secured business line of credit means the borrower needs to provide collateral in the form of business assets. Since the liability is short-term, the lender typically prefers a short-term asset as collateral such as product inventory or accounts receivable.
Unlike ordinary term loans where you get the lump sum fund after approval, a line of credit offers an additional degree of flexibility. You can use the credit line, pay it down, and use it again all within the term specified by the lender.
When is it best to consider applying for a business line of credit?
A business line of credit makes the most sense when a company regularly needs funds for short-term expenses. The following examples are considered ideal applications of a business LOC.
- If a company is seasonal and only generates profit during specific months, a business LOC may be used to cover expenses during lean months. However, it is essential that the company can may regular repayments. A business LOC can help the company continue regular operations despite the significant profit fluctuation.
- A line of credit may be used to fund a new marketing campaign that could potentially attract more customers. If the campaign proves successful, the company will have the funds to pay off the credit line.
- If the company is waiting to receive payment from clients, the LOC may cover certain overhead expenses.
Applying for a business line of credit requires good credit. As such, newly established companies may find it difficult getting approved. Lenders often trust businesses with a well-established record and steady revenue.
In conclusion, a business line of credit is an excellent financial tool to augment short-term capital needs. If you feel your company qualifies to apply, there are online lending platforms available with attractive offers ready to accept your application.