What to Know About a Business Line of Credit
While businesses can make a lot of money, they can also have a lot of costs. Depending on the industry, these costs may include equipment, marketing and payroll. Sometimes the costs are larger than the business can fund immediately, so the businesses have to look for other options to support themselves. One of the ways to do this is through lines of credit.
Many small and medium-sized businesses use lines of credit to support themselves. A business line of credit is similar to a personal line of credit; the business has a certain credit limit and can spend a certain amount of money under that limit.
Typically, business lines of credit are larger than personal ones, as businesses take in more money than a single individual. Like personal lines of credit, business lines of credit do have interest rates, though they may vary. It is also generally expected that these credit lines will be repaid within six to 12 months. Some fees can be waived if payments are received early.
Businesses that take out lines of credit do not typically need to have as high a credit score as compared to taking out business credit cards. There are generally no annual fees associated with them either.
There is a lot of flexibility in business lines of credit because you can use any amount of money that you need, up to your credit limit. For example, if your credit limit is $100,000, but you only need $50,000 for a new piece of equipment, you only need to take out that money and repay it. This differs from traditional loans, which require you to take out a fixed amount of money.
There are many reasons why businesses might choose to use lines of credit over other financing options, like traditional bank loans. Lines of credit are typically faster and easier to obtain, which makes them more desirable, in addition to being more flexible and usually having lower interest rates.
They are ideal for businesses that need money for something in the short-term, such as covering a seasonal expense or payroll. They may also be used for times when there is a cash flow shortage or unexpected expense, like a costly equipment repair.
Lines of credit are typically not used for long-term investments, like buying a business or completing a renovation that could take months. In these cases, traditional bank loans are typically better options than lines of credit.