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8 things you need to know about business lines of credit

20 December 2019

Small business owners understand that, at some points, accessing capital for growth is essential. There are few businesses that never need to seek this kind of capital. Most businesses will experience periods when they need to pay for unplanned expenses, or when their invoices are late and their wages are due. The ability to access funding at times like these could mean the difference between business success and a catastrophic closure.There is a lot of choice when it comes to funding. There are various options from traditional bank lending to alternative finance and crowdfunding. One option is increasingly popular among small businesses. A business line of credit provides flexible funding without many of the risks associated with more traditional forms of finance. Discover more about the business line of credit, including the Fundbox line of credit, and find out whether this form of funding is suitable for your business. Find out about the advantages and disadvantages of a flexible credit line in order to discover how business lines of credit can benefit your company.  

Here are eight essential things you need to know about business lines of credit. 

1. A Business Line of Credit is Markedly Different From a Traditional Term Loan

Unlike a traditional term loan, a line of credit allows you to borrow a set amount of funds when you need them. You also pay back the line of credit when you need to. This is different from a traditional loan that has a fixed repayment schedule. You can use a line of credit for all kinds of expenses but you don’t have any penalties if you pay back the credit early. 

2. A Line of Credit is Revolving

When you use up the amount of funds in your pre-set limit, you can repay them in order for the funds to be made available again. You can keep using the revolving process to top up your funds. This is different from a loan where you will typically access the funds once and then repay the load. This makes a line of credit much more flexible. 

3. A Line of Credit Helps Cash Flow

All businesses experience cash flow problems at some point. Large invoices are late being paid, there is new equipment to be bought or software upgrades to purchase. You may need to pay for an expense such as wages for a big event. Being able to maintain cash flow could be the difference between surviving and going under. A line of credit allows businesses to maintain their activities, confident that they will be able to pay necessary expenses even when cash flow has dried up. 

4. Lines of Credit Have Many Uses

Business often use a business line of credit to be able to grow and develop. They use a line of credit to hire new staff, purchase new equipment, expand an office, develop an office, purchase extra stock, or to maintain cash flow during quiet periods. 

5. There Are Two Main Categories of Business Lines of Credit

Lines of credit are typically secured and unsecured. Secured business lines of credit use the business’s assets as collateral against the loan. If the business cannot pay the line of credit, these assets will be taken by the lender. Unsecured lines of credit are usually the preferred option since there is no collateral held by the lender. However, since there is no security there is often more competition for the funds and it can be harder to be approved. Businesses need good credit in order to secure these lines of credit. 

6. Lines of Credit Are Flexible

A business can draw on funds whenever it needs them. You can use the funds for whatever purpose you need. You don’t have a limit on how many times you can draw on and then repay the funds. The line of credit is a flexible arrangement and is certainly more flexible than a traditional loan.

7. You Can Get Further Benefits

If you work well with your lender and demonstrate that you pay on time and you use the loan well, you will usually be eligible for benefits in the future in terms of a higher credit limit, or further financing opportunities for larger projects. You can also secure better business credit ratings, which will help you build your business in the future should you need access to other forms of finance. 

8. Disadvantages of Lines of Credit

A line of credit is not for every business. There are some disadvantages associated with lines of credit. The process of applying for a line of credit can be complicated and time consuming. You will need to provide a lot of financial information. Also, there are fees associated with a line of credit and the interest rates can build up. It helps to get a deal with a low interest rate in order to minimise fees. It is also important to understand how much to borrow so that you stay within safe limits and do not build up too much debt. 

Getting a business line of credit is not as hard as accessing some of the other forms of financing on the market. In fact, it can be an effective way to access money when you need it most. There are many different options available for business lines of credit. Many of them are fast and stress-free to access. It certainly helps to shop around and find a good deal with a low interest rate, which will minimise any potentially large fees further down the line. Look for reputable lenders and find a line of credit that provides a cash flow solution for a small or medium sized business. Business lines of credit suit many small businesses and there are many advantages to accessing this form of small business financing. 

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