Business Line of Credit or Small Business Loan? 4 points to consider
A business line of credit is usually recommended for short-term financing needs, like buying inventory and paying for a surprise expense, but it can also be used to cover long-term expenses, such as advertising campaigns and insurance costs.
Line of credit borrowing limits often range from $5,000 to $150,000 and are smaller than a short-term loan. They are also revolving. This means that businesses can use a line of credit as often as they want, as long as they make payments on time and don’t exceed their credit limit.
In order to understand whether a business line of credit is the best funding option for your company, there are several factors to consider.
Think of your company’s future
The businesses that benefit from most from lines of credit are often vulnerable to cash flow shortages or short-term capital needs. Since business lines of credits are revolving (meaning your credit line resets to the original amount once you pay off your balance like a credit card), they’re a more ideal option for financing an ongoing marketing campaign or signing new customer project—especially if you’re uncertain of exactly how much money you’ll need—than a lump-sum loan that tends to be paid through periodic, consistent installments.
That being said, a business line of credit is best suited for companies that can look far into the future. They have a plan for how the line of credit will cover gaps in certain business cycles and do not wait until an expense shortage to apply for a line of credit. This is especially important because, unlike most business funding options, a business line of credit is designed to be approved and distributed before the funds are actually needed. Keeping this in mind, it’s best to look ahead and apply for a line of credit before funding a new project so that you have the extra cushion before running out the clock.
Be aware of specific times for payments
Companies that have explored debt financing programs know that every business lender has varying requirements. This is especially obvious when comparing a business line of credit from a bank to a business line of credit from an alternative business lender.
Most traditional lenders, such as banks, may charge fees for opening the line of credit or making certain transactions. They may also require businesses to have strong revenue and at least a few years of credit history to qualify for a line of credit. In addition, banks may require collateral, which can be seized by the lender if a business fails to make payments.
Online business lenders, on the other hand, may have looser qualifications than banks. However, these lenders are also likely to charge higher interest rates than banks and may have lower credit limits.
Although business lenders may impose varying rules, borrowers should plan on being able to pay off their entire balance at some point in time. After all, a business line of credit is a revolving program, which can only be taken advantage of by regularly paying the entire balance.
Would you require collateral?
Traditional banks often have high minimum qualifications and require significant collateral, like expensive equipment or real estate, which can be seized by the lender if a business fails to make payments. Many loans also require a specific purpose, such as taking out a student loan to pay for college tuition or being granted a mortgage to buy a house. Lines of credit, however, do not typically have a specific purchase purposes, so borrowers can spend on a variety of items without the lender’s approval and no assets have to be appraised.
Before applying for a line of credit, it’s helpful to build business credit and improve cash flow. Showing strength in either area may give you access to lines of credit with lower interest rates and higher credit limits.
What are you planning to use your business line of credit for?
As mentioned earlier, many borrowers rely on business lines of credit as a cushion during a busy season or a rough patch. However, this doesn’t mean a business line of credit should be used by any company that is struggling to pay its bills. In fact, business lenders rarely approve a business line of credit to cover operating losses.
Companies that are attempting to cover losses from past operations will likely struggle to pay off their line of credit. In other words, a company is much more likely to get approved for a business line of credit if it’s trying to finance expenses that will lead to a surge in profits.
Are There Other Options?
You might like to consider getting your own money faster so that you can purchase more inventory or invest otherwise in your business as needed. Payoneer Capital Advance gives you this ability. The service enables you to have cash in hand when you need it most.
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