The primary inhibitor for newly launched startups and SMEs is obtaining financial support. For entrepreneurs who are in the early stages of setting up a small-scale enterprise, it is expected to experience complications with having a steady cash flow.
A study by U.S. Bank showed that 82% of small businesses fail due to poor cash flow management and lack of financing. Investing in new equipment, hiring more workers, or renovations are expenses that can be quite hefty. This is especially true for new businesses because they have to wait for sales to pick up and generate a considerable amount of revenue to start aiming for future business growth.
Obtaining a business line of credit is one of the many ways through which you can provide stable financing for your business, allowing it to flourish and grow without being held back due to a lack of monetary support. Let’s find out more.
What Is A Business Line Of Credit?
Often compared to a credit card’s workings, a business line of credit is a loan option that is both flexible and convenient. It provides businesses with a maximum credit limit based on your credit rating, current cash flow, and other factors, including the lender’s requirements. Unlike a business loan, a line of credit does not involve a lump-sum disbursement. You can withdraw any amount of cash from your line of credit whenever you need it.
A business line of credit is of 2 types. Businesses can acquire either a secured or an unsecured line of credit. In a secured credit line, the lender benefits from having collateral in terms of any asset(s) that the business owns. An unsecured line of credit does not require declaring any collateral.
In the latter case, the lender assumes a greater risk, but the borrower is free from the risk of having their assets seized.Even though an unsecured credit line reduces certain risks, a secured one provides other benefits essential for newly established businesses and startups. Here are 3 reasons why a secured line of credit is a better option than an unsecured one.
1. Higher credit limit, lower in Higher Credit Limit, Lower Interest Ratesterest rates
The maximum credit limit and the interest rates are dictated by the amount of risk the lender is taking. In a secured credit line, the lender’s risk is lower because they have the security of having collateral to fall back on if the business defaults on loan repayment. Due to a reduced risk factor, lenders are more likely to offer a higher credit limit and significantly lower interest rates on your offer.
Such leeway is extremely beneficial for SMEs. A higher credit limit means you have more funds to work with. If you’re planning on getting more inventory or expanding your business operations, you could easily start financing the new business plan. Thus, a secure line of credit proves to be more reliable and profitable in the long run. Additionally, the lower interest rates make it easier for you to pay back the credit. It’s easier to make payments on time, especially for SMEs, which tend to have fluctuating profits.
2. Longer Loan Repayment
With a secure credit, lenders undertake lower risks, which reduces interest rates and gives lenders the margin to offer an extended loan repayment period. The more valuable the asset you can offer as collateral,
the more likely it is for a lender to offer longer repayment terms. This is ideal for small businesses that take out the loan to make up for sudden financial losses to stay afloat. A longer repayment plan gives businesses more time to accumulate revenue and repay the loan quickly once the situation becomes more stable.
3. Lower Credit Ratings Are Accepted
It can be challenging for many businesses with poor credit to apply for financing. Sometimes, a secured line of credit becomes necessary if your business credit rating isn’t up to the mark. Lenders mainly consider your credit score since it’s a measure of how likely you are to repay the loan. Putting up a suitable asset to back up the loan will convince lenders to overlook a less than optimum track record.
Even if your business does not have a good credit rating, you can revamp and gear your business towards a better trajectory. Once you have a revised business strategy, you can use a secure line of credit to get your hands on much-needed cash to explore new opportunities for business growth!
However, in some cases, lower credit scores are an indication of higher risk to lenders. As a result, they might charge a higher interest rate on loans. Despite that, interest rates for a secured credit line will still be lower than an unsecured line of credit. This is why it is essential to acknowledge that obtaining a secured cash works in favor of SMEs with low credit scores.
If you are part of an emerging startup or SME looking to get a secure line of credit for your business, you can start by getting in touch with us at Lebit Finance. Our expert financial advisors and consultants will help you find the right solutions as soon as possible.