One of the most important decisions you will ever make is whether to use a business line of credit versus loan. For many business owners, this decision is based upon the long-term viability of their business. Businesses need access to money in order to grow and prosper. While many banks provide lines of credit that can be used for short-term expenses, a business may not need such funding over the long-term.
If your business has been established for some time, then chances are good that you will have obtained a traditional line of credit. With this type of financing, a business owner can draw down as much or as little money as they need to for various reasons, including operational expenses and inventory turnover. A business line of credit works similarly to a personal credit card in that you are responsible for making payments on time. In some cases, a business line of credit can even exceed the amount of available credit on your business credit card. When this occurs, a business owner will be assessed with an overdraft fee.
Because a business line of credit is much more expensive than a personal loan, most business owners elect to finance their business through cash flow generated through other means. This can include credit cards, consumer loans, business credit cards and other assets. When financing through these sources, business owners must be very careful about managing their resources so as not to become too heavily indebted. A cash flow statement is often required along with a balance sheet so as to prove that your business is actually generating profits.
A business line of credit is only effective if your business has reasonable collateral. Typically, business owners obtain small business loans from banks to supplement their line of credit. If your company has little collateral to offer, then obtaining a business line of credit is not a feasible option. It is also difficult to obtain a small business loan if you are already neck-deep in debt.
Business lines of credit are useful when your business requires frequent money transfers to meet organizational needs. This is especially true if your business has numerous employees. A business line of credit works well for businesses that routinely send or receive funds. In addition, the funds remain secure as long as they are used for the business' specific purposes.
On the other hand, business lines of credit are not without risks. Since you are given access to large amounts of money, this type of loan can be tempting to use. As a result, you need to ensure that you only use this type of loan for important business operations. Before you obtain a business line of credit, talk with a consultant to learn more about your business and whether or not a loan is a right solution. The last thing you want is to take a business loan to expand your business.
One of the major differences . . . . . . between business lines of credit and loans is the interest rate. A business line of credit has a slightly higher interest rate than a loan. The reason for this is that the interest is based upon the value of the credit account. The benefit, however, is that you have a continuous source of cash that you do not have to repay until the business is profitable enough to pay back the credit. This keeps you in business even after paying off expenses.
Both a business line of credit and a loan are great for growing your business. However, if you are just starting out and do not have a great deal of equity in the business, a business line of credit is a better option. The small monthly payments will help you pay off your debt quickly while you build your business.