When you need funding for a specific business purpose, traditional business loans are a great solution. But what if what you really need is just a little extra wiggle room in your cash flow? Perhaps you don't have a specific purchase in mind, but living with the tight turnarounds between payments from customers and running payroll is leaving you with night terrors.
A traditional term loan would give you the extra cash on hand--but then again, you might not ever need it. What if your razor-thin cash flow situation just works itself out? Is it still worth paying interest on a loan you didn't actually need?
For business owners weighing these pros and cons, a business line of credit may be the perfect solution. Applying for a line of credit allows you to plan for the worst case scenario, without actually paying for the funding unless and until you need to use it.
Business lines of credit offer a set amount of funds readily available in the event of an emergency or unexpected expense. They typically come with higher interest rates than a traditional term loan, but that cost is still less expensive than paying interest on funds you don't actually need.
Does a business line of credit sound like the perfect solution for your business needs? If so, read on to get the scoop on the most popular business lines of credit on the market.
Online Lines of Credit
If you're still building your business's financial history or you're working to improve your credit score, you may be able to qualify for a business line of credit through companies like Kabbage or OnDeck. Kabbage and OnDeck offer credit lines using similar eligibility requirements to that of shorter-term loans (which OnDeck also offers). Although these lines will have higher APRs than most other types of credit lines, they can be the right solution for younger businesses needed to build credit.
For more mature businesses, Lending Club is one of the first major online lenders to offer a line of credit that has eligibility requirements (and therefore APRs) equivalent to that of longer-term online loans. This is exciting news for businesses who have strong credit and revenue but are searching for the ease and convenience of an online experience.
Asset-Based Lines of Credit
Lenders like Dealstruck and the Credit Junction offer asset-based lines of credit which can be collateralized by things such as your inventory or invoices. Often the line amount itself is based on the value of these assets and can even fluctuate as the assets themselves do.
This product is good for securing larger lines at lower rates, as collateral is in fact involved.
Bank Lines of Credit
As always, your good old fashioned brick and mortar banks have the lowest rates when it comes to borrowing money. The caveat, of course, is that they're much more difficult to qualify for, and they take much longer to secure. So even if you meet the criteria necessary to qualify, you may not be able to wait long enough to get one. But if you think you can qualify for a bank line of credit, and you have the time to wait, this should absolutely be the first place you start your shopping.
Credit cards differ from business lines of credit in that they typically have higher rates, and often charge a fee for cash advances, but essentially, they're the same thing: access to a predetermined limit of funds that you can draw from as needed.
Having a business credit card can be a great way to build your business credit, and you can often earn great rewards. Applying for a credit card is also extremely quick, and you don't need to wait for approval to make a purchase.
There are many cards that offer a 0% introductory APR. If you feel you only need a line of credit for a smaller time period, say 9 to 12 months, this could be an excellent option as long as you know you will be able to pay the balance down.
When Should You Apply?
Unlike loans, which are typically used for a specific purchase, a business line of credit is meant to help you with your day-to-day business expenses or help you meet financial obligations in a cash crunch (i.e. managing payroll or replacing bad inventory).
But remember, the best time to apply for a business line of credit is before you actually need it. After all, you wouldn't wait to set up a safety net after you fall from the high wire!
As long as you meet the application requirements, there's no reason not to go ahead and apply now for a business line of credit. In the face of crisis, you'll be glad to have this back-up plan in place.