What Lines of Credit Are Available for Business Owners
Small businesses strapped for cash often turn to lines of credit to help smooth out the flow while other solutions are being worked through. For instance, sometimes you need a little money now to hire new employees or buy additional supplies so you can bring in the big bucks later. Several credit lines are available for business owners, such as traditional, short-term, and backed by either equipment or invoices. To choose the right one for your company’s needs, you should first understand how each type can benefit you.
A traditional credit line for business owners typically comes from the same bank you use for business checking and savings accounts. This line will usually have a lower interest rate than a loan of a similar size, but the rate can increase if you miss payments or go over the limit. Traditional business credit lines function much like a personal credit card. They are there for a cushion if cash flow problems arise in the future or to help pay for growth investments such as equipment and supplies until you can see a return.
Short-term lines of credit are usually offered by third-party companies instead of your bank and often feature higher interest rates and lower credit limits than traditional ones. These credit lines still provide a pool of potential capital when needed. They can be an excellent way for younger companies to gain access to the capital needed to grow without a strong credit history.
Collateralized credit lines, those backed by equipment, are more invested in your company’s future than in the past, which means that they will look more at the value of your equipment and what you can do with it than your credit history. These credit lines can be easier to secure for smaller or newer businesses, but your equipment can be repossessed if you fail to pay them back.
An invoice-backed credit line, or accounts receivable financing, uses your invoices as collateral. Once your clients have paid you for the work done, you repay the credit line. The lender, in this case, is usually called a Factor or Factoring company and may take over the billing and collections of your invoices. The higher the dollar amount of your invoices, the more you can borrow.
Researching the various lines of credit available for your business can help you find the best fit for your qualifications and needs. These lines can help you pay for new or additional equipment, stock up on supplies for the busy season and much more.