If you are a small business owner, you have probably been thinking quite frequently about procuring a business loan. Much like any other business out there small businesses go through highs and lows, and when the times are more challenging, a line of credit acts as your safety net or as a source of capital to fund new opportunities.
Unlike other business loans, a business line of credit provides you with the flexibility to utilize any portion of the available credit. A credit line provider gives the business access to a specific amount set by a credit limit that one cannot exceed.
When you draw from the credit line, you will pay a draw fee, typically 1%- 3 plus interest on the portion borrowed. This type of financing is a form of a business loan combined with a personal line of credit. You pay a weekly or a monthly payment plus fees until the amount borrowed is paid in full.
The term line of credit sometimes refers to revolving credit. Because after the balance is cleared, you can reuse the credit line amount repeatedly. However, there are a few lenders who will ask you to reapply for renewing your credit line. Renewing your line of credit should not be very challenging as long as you have made your payments on time.
Typically, a business line of credit is an unsecured type of debt. This means that most of the time, you will not be required to put up collateral. However, for higher amounts or longer repayment periods, lenders may ask you for a personal guarantee.
If you need funding for any amount exceeding $150,000 and don’t have an asset to use as collateral, you may have to look for other products such as a merchant cash advance or an unsecured term loan.
Example for Line of Credit
If you decided to test a new marketing campaign that added $5000 to your monthly budget for ads and content. You apply and obtain $30,000. This line of credit makes available $30,000 for you to use immediately. You don’t have to use the entire amount; you can take small portions and pay interest plus fees specifically on the amounts borrowed.
Making timely payments can help you increase of credit line and get better terms or other business loans in the future. The credit line also provides a safety net in case of unexpected expenses and cash shortages. Usually, you only have to apply and get approved once and then use the available funds repeatedly.
To be eligible for this type of financing, you must be in business for at least one year and have $100,000 or more in annual revenue. In some cases, for a higher amount and a longer duration, lenders may ask for collateral.
Merchant cash advance is a working capital solution that provides your business with a sum of cash in exchange for a portion of future receivables.
Invoice factoring designed to provide you with instant access to fast cash in exchange for invoices. That cash can be used for a marketing campaign or any other urgent need.
An equipment loan can help you acquire physical assets for your business with a low down payment. This alternative fits businesses that are looking to upgrade their equipment.
A business term loan provides you a sum of capital that you pay back with fixed, equal monthly payments over a set repayment period.
SBA loans are partially guaranteed by the U.S. Small Business Administration and provided by traditional banks, online lenders and credit unions.