Find out everything you need to know about business lines of credit

September 22, 2022

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Master ImageThere is no doubt that small businesses are the engine of the American economy, and a business line of credit can be the difference between success and failure. A line of credit can provide much-needed cash flow during tough times or help you expand your business when new opportunities arise. In this article, you'll learn everything you need to know about it.

What is a business line of credit?
A business line of credit is a flexible loan for businesses that works like a credit card. Businesses withdraw money from their line of credit as needed and only pay interest on the borrowed portion of the money. When they repay the borrowed amount, they replenish the available funds. These funds can usually be accessed through a business checking account, credit card or mobile app. There are two types of business loans you can use: secured and unsecured.

These two options can differ significantly in terms of interest rates, fees, and requirements.

  • Secured Business Loan - This type of LOC requires the business to pledge certain assets as collateral to secure the loan. Since a line of credit is a short-term liability, lenders typically require short-term assets, such as accounts receivable and inventory. Capital assets such as real estate or equipment are not typically required by lenders to secure a LOC. If the borrower is unable to repay the line of credit, the lender takes ownership of the collateral and liquidates it to pay the balance.

  • Unsecured Business Line of Credit - No specific assets are required as collateral for this type of LOC - however, a general lien and personal guarantee will likely be required. Since this type of line of credit does not have specific collateral attached, the business will likely need to have a stronger credit profile and a positive business record to qualify. In addition, interest rates may be somewhat higher, and unsecured lines of credit are often smaller.

  • How does a business line of credit work?
    A business line of credit is a flexible lending option for businesses. It can also be referred to as a revolving line of credit. You are familiar with a line of credit if you use a credit card. It allows you to access funds from your line of credit, pay it back in full or in part, and then access it again. With a line of credit, the business owner decides when and how to use the borrowed funds.

    Interest is usually charged only on the line of credit used, and interest rates can be fixed or variable. Variable interest rates usually change as interest rates change in the economy. Some lenders charge a fee each time you draw on the line of credit.

    In addition, there may be a closing fee, an annual fee, and/or a monthly fee if you do not use your line of credit. With any line of credit you are considering, be sure to read the terms offered carefully to make sure you understand any fees that may apply.

    There is a set repayment period, but payments vary depending on the amount borrowed. With some lines of credit (especially those offered by traditional banks), there may be a draw period during which you can access the funds and make interest-only payments. After that, the business owner may enter a repayment period in which the outstanding balance must be repaid over a period of time. Online lenders, on the other hand, typically offer short-term lines of credit that fully amortize (or must be repaid) over a shorter period of time, often 6-24 months.

    A business line of credit can be a valuable tool to spur growth and fund other profitable initiatives. They provide the financial flexibility to fill gaps in normal cash cycles, can be used to leverage resources to sustain year-round operations for seasonal businesses, and can fund expenses that drive value and reinforce success in conjunction with other financial tools.

    Maintaining a line of credit in good standing can help improve your credit score and get you better credit terms when seeking future financing. Many small business experts recommend that first-time applicants establish a modest line of credit and pay down debt quickly to build a credit profile.

    In today's fast-paced world, keeping your small business finances in order can often be a challenge. Depending on the specific needs of your business, a small business line of credit could be the simple solution you need to achieve your growth goals - and at a pace that works for you.

    Finally, remember that Ameriquest is a partner you can count on to help you achieve any project you dream of. Our mission is to provide small businesses with a wide range of financing products that allow them to raise funds more efficiently to complete their projects. We look forward to participating in the creation of a sustainable future for your business.

    Contact us at (800) 796-9667

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