A business line of credit provides access to funds as needed, up to a predetermined limit. The primary advantage of a line of credit is its adaptability. You do not pay interest until the line is drawn on, making it ideal for emergencies because funds are always available when needed. This can be an unsecured or secured line of credit with a variable interest rate and multiple repayment options.
What are business lines of credit ideal for?
Business lines of credit are ideal for meeting short-term financial needs such as increasing cash flow, locating seasonal working capital, locating inventory, materials, and equipment, and funding accounts receivable. A secured business line of credit and an unsecured line of credit are the two types of business lines of credit. Fundamentally, both types provide the same benefit to an entrepreneur in that they provide a constant source of credit that the business can use for operational purposes. Secured and unsecured lines of credit can both help businesses, with large corporations able to borrow up to a few million dollars and small businesses able to borrow up to a few thousand dollars.
Because the conditions for unsecured business lines of credit are less stringent than those for secured business lines of credit, most businesses prefer them. Before a secured line of credit can be used, the owner of the business must provide the bank with collateral, guarantees, or proof of personal possessions. Extending a line of credit on an unsecured business loan is only likely to be approved based on the business’s credit profile and ability to repay.
Risks that lenders take
Lenders tend to grant more secured versus unsecured business lines of credit for the simple reason that the secured option allows them to disregard minutiae, such as how long the enterprise has been operational, a less-than-stellar business credit history, or uncertainty with set areas disturbing the business. These factors could scare off the lenders who think of such an enterprise as a higher risk in terms of pay back capabilities or meeting the terms of the business line of credit, and so they may be wary about funding an unsecured line of credit.
Terms and conditions vary, but in general, a business line of credit is designed for companies that need just enough money available to cover expenses that come up unexpectedly. It’s also useful for funding short-term growth opportunities that may not be fully budgeted for just yet, such as the purchase of new equipment, inventory, or hiring additional staff. Business loans can be helpful to stabilize cash flow, but they require a long-term commitment and repayment schedule to repay the amount borrowed.
And as always, if your business needs a line of credit, please feel free to visit us here at Rifi Capital or apply directly with us by going to rificapital.com/apply. For more information about Business Line of Credits, please feel to read more here.