Need to manage cash flow or inventory levels? Cover an unexpected repair? Then a business line of credit probably makes sense. If you’re looking to open your first business line of credit, you should understand what it is and your choices.
LINE OF CREDIT
A business line of credit is similar to a credit card because both offer an available amount, or limit, you can spend. Both charge interest on the credit you use.
Depending on how old your company is and its demonstrated sales and profits, a lending institution may offer you a secured or an unsecured line of credit. Having a secured line means the lender can take possession of collateral named in the contract in the event of non-payment.
HOW IT WORKS
Your business may have already prequalified for a line of credit, in which case the lender has no doubt already notified you of this status. As with a credit card, you may make a lump sum payment or monthly installments, with the latter paid off at variable interest rates that can be hefty, depending on your business’ credit rating.
Your company’s creditworthiness may be determined, in part, by a credit report drawn on the business and/or a credit report on your personal finances, depending on the legal structure of your business. There are also some online lenders that will offer short-term lines of credit and loans that demand repayment within a few weeks to a few months, usually at higher interest rates than a bank or similar institution.
When comparing lines of credit, shop not only by interest rates, but also by examining total fees that lenders charge for account maintenance and withdrawals. Don’t forget to ask other business owners and your accounting professional for recommendations.