For business owners, a line of credit can be a valuable tool to run business operations financially. In simple terms, a line of credit gives businesses access to funds to take care of any business expenses.
Understanding short-term line of credit
Think of a short-term line of credit like a credit card. Like a credit card, there is no restriction on how a line of credit can be used. There is a credit limit in a line of credit as well. Once that limit is reached, you will have to repay those funds along with the due interest to replenish the credit limit. Business owners generally opt for a line of credit to take care of short-term business needs that need not be addressed by taking a business loan. The primary advantage of taking a line of credit and maintaining it in good standing is that it helps you build a sound credit profile.
Difference between a business loan and line of credit
There are a few key differences between a typical business loan and a line of credit. A loan has a fixed amount of funds to be deployed, and interest is payable on the entire amount of lump-sum funds received. On the other hand, a line of credit is a limited pool of funds that the business owner can access. The business owner can borrow whatever amount s/he needs and has to pay interest only on that amount. In most cases, a short-term line of credit has more specific eligibility criteria than a business loan. In some cases, the turnaround time for a line of credit can be funded quicker, especially a short-term line of credit. Short-term lines of credit have a lower rate of interest compared to traditional business loans.
How to use a line of credit?
While there can be other uses, the primary use of a line of credit is to maintain regular business cash flow. While it is a fundamental business concept, it is not so simple to implement in real life. Cash or liquid funds are necessary to meet business expenses, even more so to fuel business growth. The problem arises since cash flow is variable. Sometimes, businesses don’t earn enough money to meet expenses. Those expenses can be completed using reserves. However, this is not a sustainable practice. At this point, a short-term line of credit can come in very handy.
How to maintain a healthy line of credit?
There are a few good practices to follow to maintain a healthy line of credit. The first step is to think about when to apply for a line of credit. Apply for a line of credit when cash flows are vital in the immediate future. You first need to keep in mind that a line of credit is not a tool to offset losses in the short term. Simple business logic — incurring an expense to hide losses is not a good idea. Instead, it would help if you thought about how to deploy these funds strategically. Apart from this, avoid reaching close to your credit limit. Keep repaying some part of your running balance periodically.
It can be seen that a short-term line of credit is an excellent working capital tool for any business. You can look at availing a business loan facility from a trustworthy lender. A business loan at the correct interest rates can help you go a long way, no matter your business.
But before taking any such loan, you can check the current business loan rates of interest on the lender’s website. Make sure that you plan your business cash flows to sustain the burden of EMIs; an online business loan EMI calculator can help you with that.