How to Use Lines of Credit for Small Businesses
For a small business to be capable of adapting to change, despite times of uneven cash flow, they have to have access to flexible and available cash. One of the most popular ways that businesses can succeed at having cash flow on hand whenever they need it is through business lines of credit. Here’s what you need to know about using a line of credit.
What Is a Business Line of Credit?
Unlike a business loan, business lines of credit have more in common with business credit cards. An unsecured line of credit provides businesses with access to funds that they can use for any business expense. Unlike business loans, you don’t receive a lump sum disbursement at the account opening. Instead, you can access the funds whenever you need them and only pay them back when you use it. A small business line of credit undergoes annual renewals. The interest accumulates only when you begin to use the funds.
How to Use a Business Line of Credit
Often businesses open a business line of credit to access to short-term financing. A business might use these funds to support financing for supplies, payroll or inventory. Unlike loans, a business line of credit doesn’t dictate what you can do with the funds. If you’re having problems with cash flow, business lines of credit can help you manage it.
Secured Versus Unsecured Line of Credit
Often, a business line of credit is unsecured. This means that you don’t put any collateral up if you default on the debt. The unsecured lines come with different interest rates and a varied range from around $10,000 to $100,000. For larger amounts, you may need a secured line of credit. Typically, you would have a blanket lien on your assets or a certificate of deposit.
How to Obtain a Line of Credit
To obtain a line of credit isn’t necessarily difficult. The requirements are going to differ from bank to bank. Some banks require the business to be under ownership for a specific amount of time. Business credit cards tend to have higher rates than a line of credit.
When you run a small business, if you hope to continue to grow, then you need to manage your cash flow. Uneven cash flow can completely break a business when you don’t have other funding options. When it comes to lines of credit, they can help you to manage your cash flow so that you can focus on business growth.