How to Use Lines of Credit to Grow Your Business
As your business grows, there will be times when you need to spend money on equipment, inventory, or staff but you like the capital needed to make those investments today. This isn’t a failure of the business, because the lack of funds could be due to a variety of external reasons, such as a delay in a customer paying an invoice.
To ensure that businesses are still able to grow during these periods, it’s essential to take out revolving, unsecured lines of credit. These lines of credit give your business access to funds on a rolling basis similar to a credit card but without some of the fees associated with said credit card.
What Is A Business Line of Credit?
A business line of credit gives companies access to a revolving source of funds. As you withdraw from these funds, the amount you take out begins to accrue interest, which you’ll have to pay back. Depending on the size, needs, and creditworthiness of your business, your line of credit may have a maximum available limit anywhere between $10,000 and $1,000,000.
Lines of credits are revolving. This makes them different from personal loans, where a lump sum is issued to your business that you begin to pay back immediately. Instead, with a line of credit, you’re able to withdraw funds as needed up to your total limit. As you begin to pay back what you’ve withdrawn, plus interest, the amount you pay back becomes available for you to withdraw again.
What’s The Difference Between Secured and Unsecured Lines of Credit?
There are typically two types of lines of credit: secured and unsecured. A secured line of credit means that your company is providing some source of collateral in return for access to the revolving line of credit. Sometimes this collateral can take the form of equity in your business or business-owned property. This helps lenders reduce risk on their end, as they can claim ownership of the collateral if you fail to make payments.
Unsecured lines of credit, though, indicate your business has a level of creditworthiness that collateral is not required to gain access to the revolving source of funds. Obviously, there will still be penalties should you stop making payments. However, this type of line of credit offers less risk to your business as these penalties are typically financial, such as fees or higher interest rates, as opposed to a loss of ownership in your business or its property.
A business line of credit can help your company grow even during gaps in your cash flow or during times of emergency. This makes it an essential tool for any company.