Financial advancement has paved the way for the emergence of several types of small business loans. However, if the need of financing is short-term and only occasional then business line of credit appear to be the appropriate choice.
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A business line of credit can help meet the working capital needs of business to finance inventory, fill up emergency orders and accomplish other urgent business needs. This form of business loan can also help get consistent cash flow, track business expenses and fund expansion plans.
This type of credit is a common source of funding small business needs as entrepreneurs can get a maximum amount as per their requirements. The rate of interest charged on this type of loan is relatively low compared with other lending options. However, some lenders charge a variable rate of interest, which could change over a period of time.
This line of credit scores well against other lending options such as small-business loans, online lenders and business credit cards, where either the interest rates are higher or more preference is given to personal credit score.
In order to qualify for the business line of credit, a business owner should focus on maintaining a healthy personal and business credit profile. Apart from this, if a business shows its ability and commitment to generating positive cash flows then getting a business line of credit is relatively easy.
Here are the key differences as to how a business line of credit is different from other lending options:
- Payment – An entrepreneur will have to make monthly payments for such credit. However, there is no liability if the line of credit is not used in any month.
- Use – Other forms of the loan will disburse the loan amount in full but under a business line of credit, a business owner has the option to withdraw only the amount which is required for the business.
- Interest rates – Under this form of credit, the interest rate is applicable only to the amount actually borrowed or withdrawn. There is no interest charged on the credit limit until and unless it is being used in a given month.
- Qualification – The eligibility criteria under the business line of credit is relatively simpler than other forms of small business loans.