A business line of credit is a popular choice for many small business owners, and is similar to a business credit card, and allows an open balance up to your credit limit. Unlike a term loan, there is no fixed monthly payment schedule, and interest is calculated on the amount owed, so payments are flexible. As you pay down the principal, your available line of credit increases, allowing you to use it again and again as needed. Fees vary by lender, so it’s important to understand the details.
Business Line of Credit Benefits:
A business line of credit can provide a fast, flexible solution for managing your short-term cash flow needs. Whether you are waiting for a key account to pay for a large order, have equipment in need of repair, are facing a payroll shortage, or a host of other challenges, your business line of credit can provide the financial cushion you need to manage unexpected demands on your cash flow.
It can also be used proactively to hire employees or to purchase inventory to meet growing customer demand, or to fund important marketing initiatives needed to spur sales growth.
Perhaps best of all, a business line of credit is as easy to use and understand as a business credit card.
Secured or Unsecured Business Line of Credit?
Secured:
With a secured line of credit, the borrower pledges assets against the loan as collateral for the loan. Those assets are forfeited up to the open loan amount if the borrower fails to repay the loan. Short-term assets like inventory or accounts receivable may be accepted as collateral because a business line of credit is typically used to fill short-term needs.
Unsecured:
Most business owners prefer an unsecured line of credit because they do not have to pledge assets as collateral. Because the lender is taking on more risk, the requirements for an unsecured line of credit are greater, and include good business and personal credit, and documented business revenue over a period of time. Interest rates tend to be higher, and loan limits lower than for a secured line of credit.
Business Line of Credit Requirements
✅ Collateral, which may include inventory, accounts receivable, equipment, real estate or other assets.
✅ In business for at least two years in most cases
✅ Financial statements and tax returns for at least two years
✅ Proof of business revenue, income and general financial health
✅ Loan guarantee, typically against your personal assets. If your business has a parent company, then the parent company may provide the guarantee.
✅ Financial ratio performance. Your lender will compare your financial ratios to standard ratios for other businesses like yours. Ratios include Current Ratio, Fixed Charge Coverage, Debt to Equity, and Debt Service Ratio.
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