If you are running a small business from your home or local premises you will no doubt experience the many challenges associated with operating a company with only a handful of employees.
One week you might be struggling to deal with all of the orders you have received and then there might be quiet periods where things are a bit slower. These two scenarios can quickly create cash flow problems, and that is where a business line of credit can provide a good solution.
Depending on the size of your business and your personal circumstances, you might be offered a secured or unsecured line of credit.
Here’s a look at what that means together with an overview of exactly what a small business line of credit is, how best to use the facility, and how to go about getting one for your business.
Small business line of credit explained
A business line of credit works in much the same way as a credit card. Once granted, your business will be offered access to a certain amount of funds, up to an agreed limit.
How you spend the money and when you decide to spend it is down to you.
As soon as you withdraw some of the cash you will start paying interest on that portion of the funds.
A key advantage of having a line of credit is that you only borrow what you need. This can make it more flexible and less expensive than taking out a fixed-term loan.
Best ways of using a small business line of credit
If your business is seasonal or your turnover can vary from month to month it can make it hard to budget your cash.
One of the best ways of business, a small business line of credit is to use it to cover those moments when your cash flow is squeezed and then repay what you have borrowed once you have funds back in your bank account.
That way you will be paying the least amount of interest to borrow the money your business needs when cash flow is stretched.
Know the difference between secured and unsecured lines of credit
There is a fundamental difference between secured and unsecured lines of credit. If you are offered an unsecured line of credit you will be personally liable for the debt but will not have provided any collateral as security.
A secured line of credit means that you might be asked to offer equity in your property as security against the debt. This means the bank could sell your home if you default on the loan.
What are the criteria for being approved for a small business line of credit?
There are several key criteria that lenders will often look at when considering your eligibility for a business line of credit.
They will take a look at how good your credit score is and whether your business has a good score too if that is relevant.
They will often assess what your current debt-to-income ratio is. In other words, how much debt you already have and how well you are managing it.
Each lender has varying criteria and you might find that one is keener than another to offer you a small business line of credit. The interest rate you are charged will also be relevant to how good a risk you are perceived to be.
The challenges of running a small business are many, not least the pressure you can feel on your cash flow at times. This is where a small business line of credit might prove perfect for dealing with those financial demands.
The Difference Between Secured vs. Unsecured Lines of Credit is a feature post