WHAT IS A BUSINESS LINE OF CREDIT?

WHAT IS A BUSINESS LINE OF CREDIT?
By: Allen T. May, C.E.O. of Westwood Associates, LLC
A small business line of credit has more in common with a small business credit card than with a small business loan. Like a small business loan, an unsecured line of credit provides a business with  access to money that can be used to address any business expense that arises. Unlike a small business loan, however, there's no lump-sum disbursement made at account opening that requires a subsequent monthly payment. I advise my clients to opt for a business line of credit over a business credit card with a high credit limit. The reason is simple. The amount of interest charged on the balance coupled with the "cash advance fees" the credit card issuer will charge you.
Every small business needs to be able to adapt to change, especially in times of growth or uneven cash flow. When you need ready access to cash and flexible terms for repaying borrowed funds, an unsecured line of credit can often be the ideal solution. The #1 reason to open a business line of credit is to gain access to short-term funding. And by short-term funding, I am suggesting funding needs that are 30 days to 90 days. Most businesses use these funds to support financing for operational expenses like supplies & materials, payroll or for increasing needed inventory. Cyclical businesses often rely on an unsecured line of credit as a source of off-season working capital. THINK: Florists during Valentine's Day or Costume Rentals during Halloween. Unlike many small business loans, an unsecured line of credit is not designed for a specific purpose or purchase, such as a new delivery truck or copier.
If your small business needs to access cash fast, a business line of credit could be the solution you need. Many unsecured lines of credit come with a variable interest rate and are generally available for sums ranging from $10,000 to $100,000. For amounts greater than $100,000, you may be required to secure your line of credit with a blanket lien on your assets or a certificate of deposit. Be sure to research the specifics  of any lender's business line of credit requirements. For example, many banks will require a business to have been under current ownership for some fixed about of time. Rates for a business line of credit tend to be lower than those for a business credit card, which can charge more than 20% APR for purchases and even more for cash advances, which is something I always recommend my clients to avoid at all costs.
A small business line of credit is subject to credit review and annual renewal, and is revolving, like a credit card. Interest begins to accumulate once you draw funds, and the amount you pay - except for interest - is again available to be borrowed as you pay down your balance. As with a credit card, the lender will set a limit on the amount you may borrow.
Other advantages of maintaining a line of credit in good standing may help build your business credit rating and position you for better loan terms if you seek future financing. As a management consultant, I suggest that first-time applicants should start with a modest line of credit and pay off the debt quickly as a way of building a credit profile. Keeping your small business fiances running smoothly can often be a challenge in today's fast-paced world. Depending on your specific business needs, a small business line of credit could be the simple solution you need to meet your goals for growth at a pace that's right for you.
For additional information on a small business loan and sources to obtain one, please feel free to reach out to me via email at allentmay@gmail.com or on my cellphone at: (214) 893-2623.