A line of credit is one of the instruments available to businesses to get access to funds for their business venture. Even small businesses can avail of this financing method to pay for everything from raw materials to equipment. It offers far more convenience than a traditional loan since it places a fixed amount of money at the disposal of the entrepreneur, who can use part or all of it.
However, he will be charged interest only on the amount he uses, and when he pays it back, his line of credit again gets extended to the original, cleared amount. It is as convenient as cash in hand, since it is available for meeting unforeseen expenses and shortages. A business line of credit is an open ended account that can be accessed like any other bank account, over the counter, at the automated teller machines, online or by a credit card. Unlike a loan which is fixed, a business line of credit is revolving.
Banks and other financial institutions offer lines of credit to small businesses. These are similar to short term loans and help to cover expenses in the short term. It is not difficult to get a line of credit if the business plan is sound and the entrepreneur is found to be capable. Taking advantage of an existing relationship with a bank is one of the simplest ways to get access to a line of credit. A line of credit is often provided for a period of one year and comes without any commitment fee. This is because a line of credit is a moral commitment more than a contract between two parties. A confirmed line of credit comes in the form of a letter to the depositor and a guidance line is a letter of internal communication within the bank stating the internal limit.
Most lines of credit are sanctioned without requiring any collateral. It is therefore called an unsecured line of credit. Secured lines of credit involve placing some asset as collateral. An example of this is the home equity credit line. While newly established small businesses may consider a personal line of credit, it is preferable to get a commercial credit line, which is charged a rate of interest according to the risk involved in the business.
Some of the beneficial features of a business line of credit as an option to secure additional funds are:
- Easy to procure and convenient to access
- Funds can be used simply by writing a check
- Terms of repayment are flexible
- Unsecured lines of credit do not pose any risk to personal assets
- Secured line of credit provides access to a larger amount
- Lower interest rates charged than credit cards
- Interest charged only on the amount used
- Accounts are accessible online
- Helps to cover cash flow fluctuations
- Helps to ease financial burdens
A business line of credit opens doors for further expansion of a small business and gives more freedom to the entrepreneur to use funds in the best interests of the business.