Introduction
For businesses searching for flexible financing, business lines of credit are an important tool. Unlike term loans, which give out a fixed lump sum over a set period of time, a business line of credit is revolving and offers a predetermined credit limit that you can draw from as needed. This makes them ideal for managing fluctuating cash flows, unexpected expenses, and short-term business needs. In this article, we’ll take a closer look at the benefits, uses, and factors to consider for business lines of credit so that you can determine if it’s the right type of financing for your business.
What is a Business Line of Credit?
Unlike a term loan – a sum of money borrowed from a bank in a single lump and paid back, with interest, over a specified period – a business line of credit gives you access to a specific amount of money; you can use all of it, some, or none, and the total that you owe will never be more than the amount of your limit. A line of credit is a ‘revolving loan’ because you can draw down money, pay it back, and draw it down again as long as you don’t exceed the limit. You pay interest only on what you use, and this makes it one of the cheapest ways to meet your cash-flow needs over the short term.
Benefits of Business Lines of Credit
Business lines of credit also offer benefits: flexibility, such as being able to draw and repay multiple times without having to reapply for a new loan each time; timing, such as provision for seasonally variable cash-flow needs or unexpected outlays or special charges; and reduced cost because you pay interest only as needed, just on amounts you actually use.
Ideal Uses for Business Lines of Credit
Business lines of credit come with many perks as well: flexibility, such as the option to draw and repay funds more than once without having to reapply for a new loan each time, the ability to cover widely swinging cash-flow needs, pay for unanticipated outlays or special charges, or capture a short-term opportunity; and lower cost because only interest is paid on what you use.
Choosing the Right Financing Option for Your Business
A business term loan makes sense if you need to borrow money in the form of one large lump sum that will be paid back over time out of regular cash flow. However, if you are looking to cover overall cash flow needs and you want to keep an open line of credit that can be drawn upon to pay for small expenses that may vary in amount month to month, it would make sense for you to look into getting a business line of credit. Consider your financial situation, how cash flow works for your business, and your long-term business goals.
Conclusion
Both business term loans and business lines of credit are options for your business’s growth and stability because they provide financial support. Knowing the difference, pros and cons, and uses of both will make it easier to pick the right financing for your business needs. The proper funding for your company may help your business reach a new level of success and stability within a competitive market.
