Of the many business funding programs available today, a business line of credit is among the most popular. It’s usually the next option for a business owner who first pursued a traditional business term loan only to discover that this program was not their best choice. A business line of credit is very different from a business term loan, and not just because of the interest rates or repayment structure. More differences lie within the preparation process, which cannot be neglected because taking more steps to prepare increases the likelihood of receiving convenient terms and a smooth repayment. Certain steps are very similar to those associated with a business term loan, though others are completely unique to a business line of credit.
Here are four tips for any business owner considering a business line of credit in the near future:
1. Ask If Revolving Or Non-Revolving Business Line Of Credit
There are two kinds of credit lines for businesses: revolving and non-revolving. This distinction is much more important than, say, secured versus unsecured, largely because an unsecured line of credit is much easier to obtain these days. A revolving line of credit refers to a credit line that replenishes when the amount you owe for that month is paid back. As long as you keep making monthly payments, you can borrow from what you’ve paid back so far. Your interest rate depends on how quickly you pay off your total balance, but yes, you can continue to borrow the same amount every month if you pay it right back the month after.
As if this wasn’t advantageous enough, your terms and interest rate stay the same for each round of funding. Even though you may pay off your total balance and get the same amount back a second time, it is technically considered a single line of credit.
A non-revolving line of credit, on the other hand, does not replenish when you pay off the total balance. Some lines of credit will replenish but each round of funding comes with new terms and interest rates. This is still classified as a non-revolving line of credit. So, when shopping for lines of credit, ask if the one you have in mind is revolving or non-revolving.
2. Apply When You Don’t Really Need The Money
Much like a business term loan, you are much more likely to be approved for a business line of credit when your finances are in such good shape that it appears as though you don’t really need the money. The difference is that with a business term loan, monthly payments begin immediately after funding is distributed, so you might as well start using them. With a business line of credit, you don’t have to make monthly payments until you start borrowing. You might not need to borrow, however, when you are in good financial shape. But you wouldn’t want to apply for a line of credit at this time because you might only be eligible for a lower limit or mediocre terms. The solution is to apply when you don’t need the money.
This actually makes sense for a lot of borrowers because lines of credit are very popular for businesses that are frequently prone to unexpected problems. They might experience sudden changes in demand or delays in compensation for their work. A business line of credit could be used to cover business expenses during short-lived events of this nature.
3. Don’t Max Out Any Credit Cards
The small businesses described above often make the mistake of using credit cards for sudden expenses. This leads them to max out or nearly max out personal or business credit cards, which does not look good for line of credit applicants. In fact, you could say that business lines of credit were designed to avoid this exact situation. The interest rate on the credit cards will most likely be higher than what you’d be paying had you used a business line of credit instead.
While a great personal credit score is an invaluable tool for countless business-related endeavors, it may not be necessary for obtaining a reasonably-priced business line of credit. Since cash flow is highly important for approval as well, your business’s revenue and profitability might be able to offset poor or little credit history.
4. Start With A Smaller Business Line Of Credit
Applying for a business line of credit can be difficult because you might not know how much money to ask for. After all, you’re supposed to apply before you know exactly how much money you’ll need when the occasion calls for it. If you’re the owner of a younger and/or smaller business, the general recommendation is to start small. Once you have built up your credit history and proved that you can make regular payments, you will likely be eligible for a larger line of credit. Whether you’re paying back a business line of credit or any other type of small business loan, debt financing is a skill that should be learned as early as possible. You wouldn’t want to get that larger line of credit without knowing how to handle it.