What is a business line of credit
A business line of credit is more flexible than a business loan. This is because you are able to borrow an open-ended amount of credit over time up to a certain agreed amount, which is usually based on the credit profile of your business.
Essentially, a business line of credit works very much like a credit card. You can draw as much or as little from your line of credit as you would like.
Uses for a business line of credit
Business line of credit is useful for a multitude of reasons. You might need it for the following payments:
- Paying invoices on time.
- Purchasing new inventory.
- Opening a new branch in a different location.
As a SMB, a business line of credit may be attractive as it may help them to grow and expand.
How to apply for a business line of credit
In order to apply for a business line of credit in the UK, you’ll have to speak to a lender about the amount of credit you’re looking to borrow. Before applying, it’s advisable to have an idea of how much you need to borrow. Also consider the likelihood of being able to pay it back. You might refer to any business documentation that can help you decide on the right amount.
When approaching a lender, it’s a good idea to make sure that you ask them what information they need from your first. This is so that you can prepare the right documentation.
Consider if you have any assets that you’re able to use as collateral. If you’re applying for a secured business line of credit, you’ll likely have to provide information like your personal and/or business credit history. A lender will also likely ask you for information like your business sheets, any financials, and bank statements.
Who provides business lines of credit?
There are various different kinds of lenders that can provide you with business credit. This could be via a bank, an independent lender, or credit union.
Interest on credit balance
Business owners looking to use a business line of credit are charged interest on their balance. How much interest rates are on your credit will vary depending on which lender you’re using. According to Funding Bay, the average unsecured loan has an interest rate of between 3% and 10%. A secured loan is usually between 2% and 7%.
Secured vs unsecured business line of credit
There are two different types of business line of credit that you can claim. These are secured vs unsecured.
Secured line of credit
Secured line of credit requires collateral. This is usually in the form of business assets but can be a property or other high-value asset.
A secured business line of credit is usually easier to apply for than an unsecured line of credit. This is because it has more flexible requirements for application. The main requirement is providing collateral to the lender.
Unsecured line of credit
An unsecured line of credit doesn’t require collateral. You can take out an unsecured business line credit in the form of a business credit card. Usually, an unsecured line of credit has higher interest rates than secured lines of credit.
An unsecured business line of credit is more useful to businesses with no assets. This is usually preferable to businesses that do not want to provide any assets as collateral to the lender. Getting approved for this kind of credit by a lender is more difficult and requires good personal and business credit.
Advantages vs disadvantages of business line of credit
While a business line of credit might be more suitable for you in certain circumstances, there are also disadvantages to claiming it as opposed to business loans or other options.
One of the main differences between a business line of credit and other types of loan is that once you have paid back your funds, you then make them available for borrowing again. To decide whether this type of credit is right for your business, please consider these advantages vs disadvantages:
Advantages of a business line of credit
Business line of credit has some advantages. These are:
- It’s quick and straightforward to apply for.
- Flexibility: business owners can choose how much to draw from the line of credit.
- It can help with occasional expenses if cash flow is tight.
- You can pay back this loan whenever you want, and there are no early repayment fees.
Disadvantages of a business line of credit
There are however some disadvantages to consider. These are:
- Interest rates are higher for a business line of credit than bank loans or business credit cards.
- The line of credit is only available for a limited, fixed period, meaning you have to reapply once this period has ended.
- It works better as a short-term rather than long-term solution (due to the above disadvantages).
Therefore, whether a business line of credit is right for you boils down to whether you are looking for a short-term vs long-term solution to a tight cash flow. You might also wish to look into business grants, if you’re a startup, for example.
Whether a business line of credit is right for you will depend on the long-term and short-term financial needs of your business. Whether you should apply for a secured vs unsecured line of credit also depends on whether you wish to use any assets as collateral or are willing to go through the process of having your personal and business credit history checked.
What’s more, businesses looking to apply for this type of credit may also have to consider whether the high interest rates of a business line of credit are right for them: those who need a more long-term solution might want to look into other types of credit available.
