If you’re a small business owner, you probably already know how difficult it can be to procure the capital necessary for growth. When you are able to get financing, it often doesn’t meet your unique needs.
Business lines of credit are an excellent solution to this predicament. They differ significantly from traditional business loans and therefore may have more to offer small businesses. However, before you apply for this type of financing, it’s essential that you understand what it is, how you can benefit and how repayment works.
How a Business Line of Credit Differs From a Regular Loan
When you’re approved for a regular loan, you get one lump sum. You’re then expected to make a set monthly payment for a pre-determined length of time until the total is paid off.
A line of credit, by contrast, has a total limit you can borrow, but you’re not required to take the whole amount at once. Instead, you “draw” on the line when you want, for the amount you want. Once that amount is repaid, it becomes available credit once more.
How Businesses Can Benefit From a Line of Credit
Flexibility is the name of the game when it comes to business lines of credit. Because you have credit on hand, you can access cash quickly when a new opportunity arises. At the same time, you don’t have to over-borrow out of fear that you won’t have enough to finance your newest venture. If you unexpectedly need more funds, you can access the available credit once again. You also have the freedom to spend this cash where you need it, whether it’s meeting daily expenses, funding a new project or covering an emergency.
How Lines of Credit Work
Just like with a regular loan, you have to pay back the principal with interest when you take out a line of credit. However, you only have to start repaying when you actually access the funds. The payment also fluctuates because it’s determined by the amount you have drawn. The same is true of interest. While this makes keeping track of debt a little more complicated than with a regular loan, it also gives you the ability to manage your debt on a month-to-month basis.
If you’re a small business owner, a line of credit can offer sizable capital without putting you far into debt. It’s an excellent resource for companies that want to grow, have a reliable source of capital or keep a contingency fund.