Why New Businesses Should Apply for a Business Line of Credit
Ezra Cabrera | February 6, 2019
A business line of credit gives new business flexibility not available with a traditional business loan. This type of financing lets you borrow money up to a certain limit (credit limit), and you only have to pay interest for the amount you’ve borrowed. It’s a great resource for managing your cash flow, buying equipment, and paying for miscellaneous expenses.
How It Works
Whereas term loans provide your business with a lump sum of cash upfront to repay over a period of time, a business line of credit functions just like a credit card. You have the flexibility to use it and repay it on an as-needed basis, as long as you do not exceed your allotted credit limit. You are required to pay interest on the amount you spend. For example, if you have a credit line of $100,000 and you’ve spent $20,000 of it, you’ll have to pay interest on the $20,000. However, most lenders won’t charge a prepayment fee so you can repay your balance earlier to minimize interest costs. For a business line of credit, you can borrow from $5,000 up to a maximum of $250,000, with interest rates typically ranging from 7.65%-23.99%.
Why You Might Need It for Your Business
Businesses need a steady stream of working capital in order to run their operations. Whether you’re looking to expand your business, purchase new equipment, or bridge a cash flow gap, a business line of credit will help you cover these expenses, simply and easily.
Here are other ways you can put a business line of credit to work on your behalf:
- Purchasing new equipment or machinery
- Hiring new employees in order to accommodate the growing demand for your business
- Purchasing additional inventory to prepare for the busy seasons
- Branching out to several new locations or expanding your office space
Since you can use a business line of credit on an as-needed basis, most business owners use it as a safety net in times of slower seasons – most commonly to make payroll and too deal with unforeseen business expenses and/or work order shortages. Simply put, it’s a great solution to remedy issues that involve liquidity and cash flow. When you apply for a business line of credit, cash flow shortages will be a concern from the past.
How Your Business Can Benefit from Business Lines of Credit
Business lines of credit can provide business owners with distinct advantages. Here are some of the ways your business can benefit from it:
Flexibility: Traditional loans give the money as a lump sum. With business lines of credit, you’re given a credit limit that you can access whenever the need arises. This is beneficial for small business owners who don’t have a lot of cash on hand. You’ll have access to your credit limit anytime, allowing you to effectively manage your cash flow.
Improve Business Credit: Having a strong credit rating is important for every business owner. This enables you to easily obtain business loans and other forms of credit in the future. A business line of credit can help you build and improve your business credit by making payment on time. If your lender reports this to business credit bureaus, they can take note of your payments and adjust your credit rating accordingly.
Build a Relationship with Your Lender: Business lines of credit are similar to business credit cards, but lines of credit often have a longer application process. As a result, you’ll interact more with lenders that issue the loan, whether they’re from banks, credit unions, or alternative lenders. This relationship makes it easier for you to apply and qualify for other loans from the same lender.
Boost Cash Flow: Cash flow gaps can affect the growth of your company. If you operate a seasonal business or you frequently experience cash flow issues, applying for a business line of credit can help. You’ll have access to working capital whenever you need it. However, do not rely on your credit limit too much and only take what you can repay.
Final Thoughts on Business Line of Credit for New Businesses
It’s easy to understand the concept of a business line of credit, especially if you’ve used a credit card before. Once you’re approved, you can withdraw money, pay it off, and withdraw again whenever you need additional working capital. but before you apply for a business line of credit for new businesses, be sure to assess your company’s current financial situation and long-term goals. You need to make sure that a business line of credit can meet your company’s needs.