Have you considered getting a line of credit for your business? If you haven’t, you should know the importance of this flexible financial tool, and the relative ease of getting access to one. While not every business needs a line of credit to survive, you should know how it works, and the best way to obtain one if and when you need it.
In case you aren’t familiar, a business line of credit is a floating loan extended to a business for a variety of purposes. At any time, a business may draw upon that line of credit to pay for upgrades, marketing campaigns, or even their salaried workers. Most of the time, that debt can be paid back flexibly, without firm monthly payments like with term loans.
So why is this tool important, and what’s the best way to get one?
Why a Small Business Line of Credit Is Important
There are many reasons why a business line of credit can benefit your company, but these are some of the most important:
- Cash flow and emergency coverage. The most important benefit will be your line of credit’s ability to improve your cash flow. You’ll always have an emergency line to tap into if you come up short, if your client demand drops off, or if you have a sudden, unexpected expense.
- Monetary flexibility. Most lines of credit also afford you some degree of spending flexibility. You can use the spending power of your line of credit for almost anything, from paying salaries to funding a marketing campaign to paying for new computers.
- Flexible payment terms. You aren’t bound to strict monthly payments with a line of credit, which means you can pay your lender back on your own terms.
- Business credit. Your business has a credit score, much like your personal credit score. Holding a line of credit and using it regularly can help you build that score, helping you qualify for bigger loans in the future.
Tips to Get One
If you’re considering getting a business line of credit, use the following tips to get the best deal (and secure your credit as soon as possible):
1. Shop around. There are many online options for getting a business line of credit, and your local banks probably have options as well. Make sure you spend time evaluating the offers of each of these establishments. Chances are, you’ll see a variety of different offers for different rates, terms, and conditions. You may even see a discount or special offer from a lender if you’ve worked with them in the past.
2. Know which type of line you desire. There are many sub-types of credit you can apply for, so make sure you know which type is most appropriate for your business. For example, a seasonal line of credit may only be used during certain periods; for example, it might cover a temporary shortfall in income associated with the winter months. Depending on your unique business needs, you may make do with a conditional line of credit, or prefer a more traditional one.
3. Apply proactively. It’s a bad idea to wait until your company is in dire straits to apply for a line of credit. There may be delays with your application that prevent you from getting the line of credit in time, or your financial situation may make it less likely that you’ll get approved. Instead, it’s better to apply proactively, long before you truly “need” a line of credit.
4. Improve your credit score (or prepare collateral). Most lenders will require your business to have a few years of reliable income before they’re willing to extend you an unsecured business line of credit. Otherwise, you may qualify for a secured line of credit, which requires you to stake some kind of collateral in exchange for the credit amount. Spend some time improving your business’s credit score, or think about what you’ll stake as collateral.
5. Negotiate for better terms. Once you find a lender you like, and a line of credit that makes sense for your business, be prepared for some negotiation. You may be able to get a lower rate, or more favorable terms just by asking for them.
With these tips, you should be able to establish a business line of credit in a reasonable timeframe, and with the most favorable possible terms. If your business is new, or if you have a shaky history of income, it may be harder for you to get the terms you want, but there are always alternative options to keep your business running (so long as you have a strong foundation).
Photo via Shutterstock