As a small business owner, you cannot rule out the possibility of cash flow issues when your business is fully operational.
There may also occur matters that press for money more than anything else. So, where do you get the funds from in such situations? That’s where you need a business line of credit.
Choosing the best line of credit for your business demands extensive research, diligence and cautiousness on your part. Before you approach any financing institution, there are a few factors you must consider.
When should you apply for a line of credit?
If your business regularly requires access to funds to meet short-term capital needs to manage the business’ day-to-day capital requirements, then applying for a LOC might make sense. You may also require a business line of credit when income fluctuates during the off-season, funds are needed for marketing campaigns, and cover recurring expenses before a client clears the invoice. So, make sure you analyse your needs properly before applying for a line of credit. For more information read our article on business funding options.
Line of credit options
The next thing you need to do if you are considering a line of credit to sustain your business is to choose between a secured or unsecured line of credit. For getting a secured line of credit, you will have to give some form of collateral, which could be property, equipment, or inventory, so that the lender can seize it if you fail to meet your financial obligations. On the flip side, a secured line of credit is relatively easier to qualify for, particularly when you are just starting, and your credit score is low. Although an unsecured line of credit does not require any collateral, it is more difficult to qualify for because the lender will then consider your personal and business credit and your company’s annual revenue.
How much do you intend to borrow?
The amount you borrow should also be a factor while applying for a line of credit. Your business may require a completely different financing product, such as a cash advance, credit card, or term loan. For instance, if you are borrowing a huge sum that you don’t think you can pay back quickly, you can go for a cheaper option like a small business loan. At the end of the day, you must consider how much money your company needs. It might be a lucrative option to go for a higher credit limit, but it could have adverse financial implications if your business truly doesn’t require it. That’s because you might tend to overspend it when you have access to excess financing.
How much money can you get — and how fast?
Before accepting a line of credit, you should find out about the lender’s pay-down provision. There may be a policy that requires you to pay your balance down to zero for a short period (mostly monthly payments) at least once a year. But not all banks provide this provision. Also, the exact approval period for a line of credit will depend on your needs and financial performance. However, in general, getting an unsecured line of credit approved takes much lesser time than any secured line of credit. So, it may be worth finding a financing company like &Solved who can help you navigate various terms.
Can you afford the monthly payment?
Lastly, you need to know whether you can afford the monthly payments associated with a line of credit. Since you don’t give any collateral, your lender assumes a higher risk. So, you will have to make sure that you can bear the interest rate charges and additional fees. You will have to analyse your cash flow and see how much you can keep aside for repayments. You can use &Solved’s loan calculator to check whether or not you are the best candidate for a business line of credit.
For an unsecured line of credit, you only pay the interest and fees every month. Also, the interest applies only to the amount of money drawn, meaning you have no deadlines to pay it back. You can pay down the line of credit as per your affordability and then draw down more of that line of credit when required.
In spite of this convenience, you still have to ensure that you can afford the price of an unsecured line of credit. The rate of interest can differ according to different factors, and there are a few one-offs and current fees that you have to account for.
If you are looking for a line of credit for your business, you can get in touch with &Solved. With us, you can get personalised rates and a quick application—just enough to keep the financial stability of your company intact.