New small business owners face many challenges, but a smart business owner is always proactive with their financing plans. In order to cover the various expenses to start a new small business, it’s important to explore the different funding options. Among them, a business line of credit is one route that many new small business owners use to turn their new ideas into realities.
In this article, we are going to explore the ins and outs of business lines of credit, the benefits of a business line of credit for new small business owners, and consider a few alternatives to lines of credit.
What is a Business Line of Credit?
A business line of credit is perfect for a new small business owner because there aren’t many restrictions on purchases. From inventory to equipment, to payroll, a business line of credit can cover any day-to-day operating expense for your small business. This provides flexibility for a new small business owner to cover all of the unexpected costs encountered along the way.
Business lines of credit work basically like a credit card. When you set up your line of credit for your new small business, you negotiate a total amount, interest rates, and length of terms with the lender. The application process is quicker than other lending alternatives, and the process can usually be completed as quickly as a day.
The Benefits of a Business Line of Credit for New Small Business Owners
One of the biggest benefits that a business line of credit provides new small business owners is the opportunity for growth. Because there is no restriction on purchases, a business line of credit is a perfect way to finance new growth opportunities – from hiring more people for new jobs, purchasing more inventory if a good deal comes up, or upgrading some equipment to increase efficiency.
Another benefit of a business line of credit is that it can always be there for you when you need it, but you don’t pay interest unless you use it. If you are short on payroll or take up an expansion opportunity, you can take on a little bit of debt now and pay it back later to bridge the gaps in your financial plan. But if you aren’t using the line of credit at the moment, you don’t pay interest on it, enabling you to keep a reserve amount of capital on hand.
Another benefit of business lines of credit is that they are revolving. Unlike a traditional loan, where you receive one lump sum of money, your line of credit goes up and down as you use it or pay toward it. So as soon as you make payments toward your line of credit, your available funds go back up.
Alternatives to a Business Line of Credit
Small business owners should consider the many different funding options available when it comes to borrowing money. A business line of credit is one option that many new small business owners have used to bridge gaps and take advantage of growth opportunities. But not all small business owners will be able to qualify for a business line of credit.
Usually, 2-3 years of business experience is required to be approved for a business line of credit. Additionally, you will need to show strong personal credit and good credit history for the business – showing that you have paid people back and that you have used credit responsibly in the past.
Because of financial restrictions, small business owners have utilized several other lending alternatives. Some examples are multi-year term loans, Small Business Administration loans, accounts receivable financing, invoice factoring, bride lending, or equipment financing. Talk with your financial professionals to figure out which option is best for your small business.
What You Need to Remember
If you’ve decided to apply for a business line of credit, be sure to keep the following tips in mind:
- Don’t apply for a line of credit if you plan to use it to cover operating losses. This will only make repayment more difficult.
- Lenders are more inclined to approve businesses with strong cash flow. To increase your chances for approval, evaluate your company’s yearly income and expenses to determine the best time to apply for a line of credit.
- Avoid running a balance near your credit limit. Paying periodically shows lenders that you value the advantages of having a line of credit.
Final Thoughts on Business Line of Credit
It’s tough to keep small business finances in tip-top shape in a fast-paced world. Depending on your company’s needs and goals, a business line of credit could be a simple and effective solution to meet your goals.