As a business owner, you know that even successful companies can deal with cash flow issues. Too much success all at once ties your resources in inventory, invoices are open but not due for another 30 days and new employees are a drain on resources initially. Lines of credit for businesses are one of the best ways to handle uneven cash flow. To learn more about how a business line of credit works and the application process, read on.
How Does A Business Line of Credit Work?
Business lines of credit work similarly to credit cards. You can borrow up to your limit on the line of credit. You only pay interest on the outstanding amount you owe. There are differences though.
Usually, the line of credit is only available from one to five years. Unlike revolving credit, each withdrawal is considered independently and you’ll need to repay the total amount in a set time, around six months. Once you have a withdrawal you can’t take more until you pay back the amount in full at which time your line of credit resets. Sometimes you won’t have a locked-in rate like a credit card, so your repayment terms can vary.
How Does a Business Qualify for a Line of Credit?
The terms of a business line of credit mean you have cash when you need it but you aren’t charged outrageous fees as you see with a cash advance. Commensurately, your lender will expect you to have strong enough credit to deserve the terms offered. For an unsecured line of credit, your business should be established and strong. After you’re in business for at least two years you’ll have the financial history to apply for an unsecured loan.
That doesn’t mean that new businesses can’t get lines of credit, but they will have to be secured. You may have to take out a second mortgage on your home or secure the line against all your business assets.
Know that a line of credit will not as much funding as a traditional loan. You also shouldn’t use it for day-to-day expenses since it’s not liquid like a credit card. On the other hand, lenders are working to find solutions for your business. Some lines of credit now come with cards you can use to easily access funds as you need them and have unique repayment terms.
Shop around for a line of credit and you’ll find one that fits your qualifications and has the flexibility you need to keep your cash steady.