Business Lines of Credit Overview

A business line of credit is an extremely important financing tool for your business. This is primarily due to the fact that this type of financing works in a very similar manner to that of a credit card. When you are granted a credit line from a bank, you are able to draw down on the balance as needed. Conversely, if you were to receive a business loan then you would be responsible for making regular interest and principal repayments on a monthly basis even if you are not using the entire amount of capital that was approved. If you have issues pertaining to maintaining a positive cash flow at all times, even though your business may be profitable, then it may be in your best interest to seek this type of financing in order to more smoothly run your business venture.

Businesses that can benefit substantially from using this type of financing facility include service based businesses, companies that carry a significant amount of inventory, and specialized businesses that frequently have a number of outstanding accounts receivables. If you are involved in a medical field, you can use the anticipated payments from insurance reimbursements as the appropriate collateral that will be required of your business. Prior to seeking any type of debt facility for your company, you should always work closely with your certified public accountant so that you can understand the risks associated with undertaking a credit obligation.

As it relates to a small business using a line of credit, you may to investigate the programs that are available through the Small Business Administration. The most popular avenue for this financing is the usage of a SBA Micro Loan which can be arranged as a revolving credit facility. However, it should be immediately noted, that you are going to need to provide a full personal guarantee for this obligation.

When you are applying for this type of financing then you should make sure that you have the appropriate collateral to secure this debt. In most circumstances, a bank or financial institution is going to want to ensure that a tangible asset can act as a security for their investment. Typically, you can use personal assets such as your home, vehicles, retirement accounts, and selected business assets for this purpose.

If you do not qualify for a traditional line of credit based on your personal assets or business assets then you can seek a number of different alternatives. One of the most popular ways to obtain a credit line is by allowing a third party to use your credit card receivables or account receivables as collateral. However, this method of financing is generally very expensive. If you decide to use this financing methodology then you can expect to pay a yearly interest rate of 15% to 25% depending on the regularity of your revenues. When you are seeking any type of revolving financing facility it is extremely important that you review all of the potential options available to you.

In conclusion, a business line of credit can truly assist your business if you have complex and ongoing financing needs. If you are able to obtain this financing through the Small Business Administration then you can expect highly competitive interest rates as well as flexible repayment terms.