For the growth of your business, you will need to have working capital in some situations. Whether you have a successful business or an unsuccessful one, you might face situations where cash flow is uncertain. In such cases, you will need funds in the type of business lines of credit. These will give you an addition of extra funds that will allow you to continue even in tough situations where you feel like closing your business.
In this article, you will basically learn about business lines of credit. Furthermore, you will also know about the different types of such credit options. Furthermore, you will also learn the major benefits you will get if you avail yourself of such a credit option. In addition, we will also give you an idea of the ways in which you can get funds for your business. Hence, to learn more, read on through to the end of the article.
What Is The Meaning Of Business Lines Of Credit?
According to Bank of America, “Every small business needs to be able to adapt to change, especially in times of growth or uneven cash flow. When you need ready access to cash and flexible terms for repaying borrowed funds, an unsecured line of credit can often be an ideal solution.” Small business lines of credit mainly include a predetermined amount. Also, every small business needs bands that are available to a small business when it needs to, and the company can pay them back later.
It is quite different from a term loan, as you have the freedom to use the funds from the business lines of credit as per the needs of your company, like expenses, inventory, supplies, etc. On the other hand, in the case of term loans, you will need to pay a fixed amount on a monthly basis.
Once you get an approved amount in the name of business lines of credit funds, you can use it as per your need and can then repay the amount you are using. On the contrary, you can use term loans once, and the repayment is also once, in addition to interest.
What Are The Major Benefits Of These Credit?
All types of loans have their advantages and disadvantages, depending on the amount you need and the situation you are in at the moment. According to Bank of America, “Like a small business loan, an unsecured line of credit provides a business with access to money that can be used to address any business expense that arises. Unlike a small business loan, however, there’s no lump-sum disbursement made at account opening that requires a subsequent monthly payment.”
Business lines of credit are a major credit tool that businesses make use of when they want to optimize the flow of cash in the business. Furthermore, as a business owner, you will be able to take full advantage of the opportunities you have at the moment.
These types of loans are useful, especially in situations when business owners try to smoothen their cash flow for the business. Whether it is about hiring new employees, opening a new office, covering payroll, inventory purchases, running a new marketing campaign, or anything else, such a type of credit helps you a lot.
What Are The Different Lines Of Credit For Businesses?
If you are interested in business lines of credit, you will need to know the major types. Generally, such credit options fall into two categories- secured business lines credit and unsecured business lines credit. Here is a brief explanation of these two types of credit options:
Secured Business Lines Of Credit:
In this case, the lender basically asks the borrower of the loan to keep their assets as collateral against the borrowing of the loan. Lenders mainly do this to secure their place for the loan in case the borrower fails to pay the loan back.
Since the liability of the loan, in this case, is temporary for the lender, he/she might ask the borrower for the inventory and accounts they can receive as collateral to avoid a bad credit situation. However, in general cases, lenders do not ask for significant assets that can be harmful to the business in the long run.
Unsecured Business Lines Of Credit:
The unsecured business lines of credit for startups, according to Bank of America, “is not designated for a specific purpose or purchase — it’s a good choice for small businesses looking for ways to better manage cash flow. Funds are typically drawn from the line of credit by using a business checking account, a small business credit card, or even a Mobile Banking app.” If you want to approve these new credit options, in this case, you will need to prove a good credit score as well as a good track record.
Business Lines Of Credit – Requirements
If you want approval for your business lines of credit, there are many requirements that you will need to fulfill for the lenders with the use of the application process. Once you apply for the loan, the lender will review the financial statement in your case:
1. Collateral: A credit is secured by collateral that the borrower provides.
2. Financial Statements/ Reports: You will have to show extensive reports regarding your business and the reason for the requirement of the loan.
3. Business Operating Time: A business needs to operate for a certain number of years to get these credit options.
4. Guarantee of the payment: If you have a small business, you will need to make the guarantee personally.
5. Economic Ratios: These include debt-to-equity ratio, current ratio, debt service coverage ratio, and fixed-charge coverage ratio.
6. Profit and revenue: You will need to show the various factors that make your business grow.
Summing Up
Hope you have found enough information regarding business lines of credit for your knowledge. If you have a strong credit line in place for your business funds, you will be able to handle the challenges of your business with full confidence. This is because you will have the satisfaction that you have the capital with you on your hand at the moment.
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