What You Need to Know About Business Lines of Credit
Business lines of credit are not unlike those for personal use. They provide you with a revolving credit line that you can use for any business-related purchases. It’s there when you need quick access to working capital for short-term needs. Here’s what you need to know.
How Business LOCs Work
There are two types of business lines of credit:
- Secured LOC: This type of credit line requires collateral to secure it. Should you default on your LOC payments, the lender can seize the pledged assets.
- Unsecured LOC: This type of credit line doesn’t typically require you to name any specific assets as collateral. The lender may, however, place a general lien on business assets.
Upon approval for a business LOC, you gain access to a set amount of funds. You can draw on the line any time you need, up to the maximum available balance. You only pay interest on the amount you borrow, and your total available balance replenishes as you repay. You don’t have to go through the loan process every time you need money.
Lenders may charge an annual fee for a business LOC. You should be aware of any additional charges associated with the line before you apply so that you know exactly how much you’ll be paying.
What You Can Use Them For
Business LOCs have several uses, including:
- Purchasing additional inventory.
- Weathering short-term cash flow issues.
- Repairing or purchasing equipment.
- Financing a marketing campaign.
- Taking advantage of unique opportunities.
Tips for Managing your LOC
While a LOC can be an incredibly helpful tool for running your business, you should use it carefully to avoid serious financial complications. Here are a few tips for managing your LOC successfully.
Get credit before you need it. The best time to apply for a credit line is before you need it. Doing so ensures that you’re prepared for when you need additional funds for your business.
Use it. Using your line of credit and paying off (and repeating the process) shows your lender that you’re responsible. It also helps to boost your credit score, which can make getting other types of financing (such as business loans) easier.
Pay your balance down to zero. Even if you have set terms for your credit line, periodically pay the balance to zero before the end. This shows your lender and credit reporting agencies that you know how to use short-term capital appropriately.
Lines of credit can be incredibly beneficial for your business. It can help you to manage short-term financial needs and build your credit history at the same time.
