Does your business need a line of credit?
November 11, 2019
Most businesses need a little credit boost at some point. After all, cash flow is the most common pain point for small businesses and startups, and is directly linked to the failure and the success of an operation.
Steady cash flow isn’t reliant on revenue. It’s about being able to get what you need now and pay it back later. For startups and small businesses, getting sufficient funding can be impossible, or at least very stressful.
Whether the weight of debt, impending deadlines, skyrocketing interest, or risking collateral, business owners need a solution to funding pain points.
How can a line of credit help your business?
Banks try to offer businesses many funding options. One method is a line of credit.
A line of credit is a limited allowance of money that a bank provides to a business. Since it’s not a lump sum and the credit amount refreshes after it’s paid off, it’s best for ongoing payments. Where a loan would cover expansion, equipment, or other necessary one-time purchases, a line of credit is great for larger costs that you’re more likely to track.
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How does a line of credit work?
With a line of credit, you take what you need and pay back what you use (plus interest). The maximum that a business can pull from the line of credit doesn’t change. Once a business pays back what it owes, that maximum amount is restored – that’s what makes it a revolving credit limit. This way, you don’t need to keep applying for loans.
Starting up a business is financially challenging due to expenses and lack of income. While there are options available through banks and non-bank lenders (such as crowdfunding, crowdsourcing, venture debt), what’s the best option for startups and small businesses? And aren’t lines of credit designated for weathered businesses, those that are able to validate their credit?
This is often the reality. Banks and other lenders don’t want to give the little guy a chance. However, options like Wells Fargo, SnapCap, and Fundbox are very willing to offer lines of credit to small businesses and startups that don’t have the history to vouch for them.
Business line of credit meets bad credit
On the other hand, maybe you do have a credit history, but it’s not very good. Bad credit can be very limiting. Bad credit means you’re not getting a loan, a credit card, or most lines of credit. But there are options. Kabbage doesn’t look at your business’ credit score, but be sure to read Fundera’s break down to see pros and cons and to determine if it’s right for your business.
Why not just use a business credit card?
A line of credit can be compared to a credit card. So why not just use a business credit card?
You can. Business credit cards are absolutely an option. But choosing between a credit card and credit line will depend on what you prioritize. And usually businesses don’t exactly have the benefit of choice, but instead must take what they can get.
A plus is that a credit card is unsecured, meaning it requires no collateral.
However, in order to ensure you pay your debt back, credit card interest rates are dramatically higher than those of credit lines. Of course, this can be avoided by repaying your credit card off in full before each monthly due date. Added debt is always incentive to pay off existing debt.
Lastly, credit card companies charge fees for cash advances, whereas line of credit withdrawals are usually free. Fundera effectively breaks down fees, pros and cons, and lists some options of credit cards and lines.
If you’re interested in lines of credit and how they can or can’t work for your business, read on.
Secured vs unsecured lines of credit
A line of credit can be either secured or unsecured.
A secured line of credit requires collateral. Think of “secured” to mean insurance for the bank. That security earns businesses access to higher credit limits and more leniency in terms of repayment than unsecured lines.
Unfortunately, the risk of sacrificing that collateral is terrifying to many business owners. One way around this is an unsecured line of credit.
An unsecured business line of credit is popular among startups because they don’t have to put up any collateral, but also because their expenses are more modest.
What do you need to open a small business line of credit?
Before all the documentation, you’ll need to talk to a bank representative that handles business lines of credit. Ask the lender: What are the interest rates and the total cost? What will my payment schedule be?
There are different requirements for all lenders. To apply for a line of credit, banks and lenders generally consider credit scores, age of business, and level of business experience.
Business owners, on the other hand, need to consider these and other requirements, plus credit line details, the application process, and repayment terms. In other words, you have to do your homework.
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What do lines of credit cost small businesses?
Interest, fees, and forms of collateral are a few cons of business lines of credit.
- Time is valuable, but the application processes and the search for approvals and favorable rates can be draining.
- Interest rates aren’t just determined by the amount owed. The market has a strong influence on the percentage added to your loan and can change from what you initially agreed to. Then add on transaction and other fees.
- If improperly managed, your line of credit can cost you drastically. Building interest, collateral, and liability can really kick you when you’re down. Access to cash isn’t always a good thing, especially if you can’t pay it back.
Limitations on lines of credit
Big banks only approve a quarter of small business loans. With business lines of credit, banks tend to either avoid small businesses or else abuse them with fees and interest rates. If a bank turns your business down for a loan of credit line, you’re left with less than cozy options and must resort to flimsy alternative lenders.
With lower maximums than a loan, lines of credit are more suitable for ongoing, smaller payments, rather than large expenses. And of course, the higher the limit, the more complicated the processes.
Additionally, it’s important to recognize that a line of credit is still debt. With access to an extra cash source, businesses might spend freely.
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Don’t be pressured by the limitations and risks of bank lines of credit. Stop jumping bank to bank in search for approved credit, and forget the paperwork. Veem Capital gets businesses the money they need and deserve.
With the Paid Now, Pay Later program, you don’t have to interview, sacrifice collateral, or fill out extensive applications. You can apply in under five minutes. There’s no cost to apply and the application doesn’t affect your personal credit score.
Veem Capital is a line of credit that enables small and medium businesses to make payments now and repay in small increments between two to six months. Businesses get paid the next business day on approved payments for a small flat transaction fee of 2%.
Don’t neglect your cash flow. Whether you’re looking to pay for global goods and services, finance inventory, or fuel your business’ growth, we’re here to help. Find out more when you sign up today.