Benefits of a Small Business Line of Credit


Alongside small business loans, a small business line of credit (LOC) is one of the most popular ways that small businesses can receive the funds they need to operate or expand. Many small business owners don’t take advantage of the benefits and flexibility that an LOC provides because they aren’t as well understood as small business loans. Fortunately, the structure of an LOC isn’t complicated, making it easy to determine if you should open one for your small business.

An LOC is very similar to a credit card, with a cap on the maximum amount that may be borrowed. The business owner may choose how much money, if any, to borrow at any time, so long as the amount the borrower owes at any point in time doesn’t exceed the limit. Unlike with a loan, where money is typically dispensed on a set schedule or all at once, the amount of money provided by an LOC depends on the fluctuating needs of the business owner.

Alongside small business loans, a small business line of credit (LOC) is one of the most popular ways that small businesses can receive the funds they need to operate or expand. While small business loans typically have a fixed rate, most small business lines of credit have a variable rate. Make sure to discuss the schedule on which the LOC interest rate will adjust with your financial institution, so there are no surprises in the future.

The payment schedule for an LOC also differs from that of a small business loan. With a loan, there is a set payment amount for a certain number of payments over the life of the loan; however, there is more flexibility with an LOC. Depending on how much of the LOC has been used and the current prime interest rate, there will be a different minimum payment due each month.

According to the United States Small Business Administration (SBA), “the way the minimum payment is calculated with a line of credit … is based on the principal (1.5 – 2% monthly balance) plus interest (prime + 3-5%).”

Because there is more flexibility with an LOC than with a loan, the borrower has to meet certain obligations in order to maintain the LOC.

According to the SBA, “…traditional credit lines…are reviewed every two years and can be turned into a term loan for the following reasons…payments not being made on time…FICO® Scores are lower than when the line of credit was originally approved.” The LOC can also be turned into a term loan if there are significant cash flow changes within the small business.

If you have variable cash flow needs, a line of credit could be the perfect solution for keeping your business running smoothly. You will never borrow more than is exactly needed for your business, so you can save on interest over the long run. When your cash flow does need some extra padding, it’s already waiting in the LOC.

“You don’t need to anticipate cash flow issues to apply for a line of credit,” according to the National Federation of Independent Businesses. “Think of it as an insurance policy that never needs to be paid until you need it.”

An LOC can be the perfect tool to help your business grow because you won’t have to turn down any growth opportunities due to insufficient cash. For example, if inventory suddenly presents itself at a steep discount, but your budget is too tight to purchase inventory too far into the future, you can tap into your LOC to take advantage of the discount. Furthermore, if an opportunity to expand your business arises, you won’t have to waste time applying for a loan and potentially miss out on the opportunity.

An LOC also creates a safety net in case your business experiences a difficult time. This makes an LOC perfect for seasonal businesses that do great during some months, but also experience predictable periods of decline.

“You can certainly tide your business over using corporate credit cards, but these rates are not as favorable as a business line of credit,” according to the National Federation of Independent Businesses. “A business line of credit works like a revolving credit card, but has no fixed payments and typically is based on an adjustable market-based interest rate.”

If you would like to discuss a small business line of credit, please don’t hesitate to contact us or stop by one of our banking centers today to learn more about how we can help.

 

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