A business line of credit (Abbreviated as LOC) grants you access a specific amount of funds which you can use as needed basis. The main advantage is that you merely pay interest on the funds that you truly withdraw. If you avoid using the line of credit, you don’t need to pay any interest. LOCs are known as “revolving” because as you repay what you borrow, the total amount that you pay becomes accessible to you to work with again (as well as a credit card).
Exactly, What is a revolving business line of credit?
In basic terms, a revolving business credit line identifies a bank or merchant supplying a specified amount of always available credit for an undetermined amount of time. Your debt is repaid periodically and can be borrowed again once it’s repaid. There is absolutely no set payment, but interest accumulates which is capitalized like any other credit. As the business makes payments on the revolving credit line, those funds again become designed for borrowing. The credit limit can be utilized again and so long as you do not exceed the utmost limit again.
Every month, you shall need to make at least the minimum payment, and interest shall accrue on any unpaid balance. A member of family line of credit has a variable interest, therefore the total amount you have to repay will change as time passes in lockstep with the marketplace. Lenders might charge draw fees, maintenance fees, and other fees for a relative line of credit. Every six months or 12 months (depends upon the lending company), you can renew the LOC if you are in good standing with the lending company. Business Lines of Credit are of help in two situations:
- Short-term working capital – Business lines of credit can be used to get working capital to make payroll or even to cover expenses when seasonal business is slow or while looking forward to customers to pay you. For instance, if you are a designer and sell clothes to retail stores, the stores usually take a couple of months to pay you for your products. You should use a business line of credit to pay operating costs and repay what you borrow when the stores pay you.
- Backup for unexpected costs – Some businesses open a line of credit before they need any cash and then make use of it for unexpected expenses. For instance, when an industrial refrigerator at the restaurant needs emergency repair, an ongoing business line of credit would come in handy.
In other cases, you may need to use a business term loan rather than a line of credit. A term loan is comparable to an auto loan or home loan. You get a lump sum of capital all at one time and must start repaying the main and interest straight away. Unlike a line of credit, a term loan typically has fixed interest levels and a fixed repayment period, so your monthly premiums will be the same before the loan is paid. The most common reasons to use a term loan are for the purchase of a secured asset such as equipment, or for long-term investments such as remodeling a storefront or buying an existing business.
Many businesses, at one time, may have cash flow challenges. One popular option to acquire short-term funding is to secure a revolving line of credit. This not only supports basic daily operations such as meeting payroll, purchasing supplies, increasing working capital or obtaining extra inventory; it offers many other great benefits as well.
Access to a source of funding can be an essential part of success in business. However, not all kinds of financing are designed equally. Unlike other sorts of lending, a revolving business credit line offers lots of advantages over other styles of funding. Here there are five advantages of a business line of credit:
- Personal and Business Separation – One of the challenges many small business owners face is keeping personal and business expenses completely separate. The benefit for a revolving business credit line is the fact that it allows you to streamline and track your business expenses as your line of credit is dedicated solely for business.
- Flexibility of Usage – A term loan is perfect for a specific use whereas a revolving business credit line gives you the option to decide how and where to spend the money on for your organization. Because a line of credit is revolving, a business may use the funds for multiple purchases in comparison to a regular loan that can only be used for one purpose only.
- Access to Cash on Demand – Unlike a regular term loan, a revolving business line of credit grants you access to a source of funding before your business actually needs it. Because of the cyclical nature of a business, you might find yourself attempting to borrow working capital to care for your company’s short conditions needs. When you are in a position to access funds on the credit line anytime, you will keep your business running well, day in and day trip.
- Flexible Payment Terms – Traditional term loans require set monthly premiums that could be challenging to the growth of a start-up business. Alternatively, a revolving business credit line offers flexible repayment terms. Unlike a regular loan, when a business has a slow month, it pays the minimum amount due instead of the fixed monthly amount that comes with a traditional loan.
- Builds Business Credit – Businesses need to have a credibly history with the major business credit reporting agencies. Utilizing a revolving business line of credit gives you the opportunity to create a positive payment history that appears on your company’s credit report. This will help you to potentially obtain future credit for your business based on your company’s credit worthiness.
A revolving business line of credit provides companies the overall flexibility, given a need, to meet any short-term funding needs. When the necessity for working capital arrives, the funds are there waiting to be used. By having access to cash on demand, you can take your mind off of money and focus your attention to growing and running a successful business.