Cash flow is a huge concern for businesses of every size, whether you're navigating a rocky economy or experience a sudden financial emergency. A business line of credit offers access to capital so that you're not left scrambling when you do need additional working capital.
Find out everything you need to know about this type of financing, plus when it might be a smart move for your business.
Business line of credit explained
A business line of credit is a type of financing, but it differs from a loan. There's no lump sum to be repaid in equal installments over time.
Instead, you get access to a line of credit up to a certain limit. You can draw funds from your credit line as you need them, whether it's to cover inventory orders, an unexpected expense, a growth opportunity, or anything else.
Interest accumulates until you repay the balance. As you do, the credit line replenishes so you can continue to borrow as needed. Eventually, your draw period will end and you'll switch to a repayment period.
Secured vs. unsecured lines of credit
You may see two different types of credit lines available to small businesses: secured and unsecured. A secured credit line requires you to put up some type of collateral that the lender can collect if you default on the financing.
Common types of collateral used by businesses include inventory, real estate, equipment, or even cash and investments.
An unsecured line of credit doesn't require collateral. There's lower risk on your end, but you may be charged a higher interest rate and quality for a lower credit limit than if you used collateral to secure the line of credit.
Pros and cons of a small business line of credit
Is a small business line of credit right for you? Here are some factors to consider.
Pros
- Provides better cash flow to support your business
- Builds business credit over time
- Establishes a relationship with your local financial institution
Cons
- May come with fees
- Could have a short draw period, after which time you can't access funds and have to start making payments on principal and interest
- Could lead to outstanding debt if your cash flow doesn't improve enough to cover payments
When used strategically, a business line of credit can be an extremely useful resource for managing and growing your business. Set parameters in place to only draw funds for predetermined purposes. That way, you avoid accruing more debt than expected and only use your credit line for expenses that will directly help your business.
Taking the next steps
Take your business to the next level with smooth cash flow and a reserve fund ready to jump on new growth opportunities. Apply online for a business line of credit with ACU of Texas by answering just a few questions about your personal and business finances.
