For business owners, a line of credit happens to be one of the most sought after options available. The reason for this is that lines of credit are flexible. Term loans, on the other hand, give you a sum of cash and you begin to pay it back right away. With a credit line, you treat it more like a reserve that you set aside. You draw up to the maximum if you need to and pay interest on what you withdraw. Once you pay off the line, you have the maximum there for you to use again. A safety net allows you to have cash when you need it at lower rates than credit cards. If you’re interested in a line of credit, here are the four options.
Traditional Credit Line
Experienced business owners use the traditional credit line most often. These have higher credit maximums, lower rates and the requirements are often higher than other credit lines. Often, these also come from banks where you have your business account. Compared to a loan, these credit lines have lower interest rates and closing costs.
Short-Term Credit Line
A short-term line of credit has higher interest rates and a lower maximum. In exchange, the requirements are more relaxed. Alternative lenders tend to offer these types of credit lines instead of traditional banks. If you have a low credit score, small annual revenue or happen to own a new business, then this might be an easier credit line to attain.
Equipment Credit Line
Sometimes small businesses will look into lines of credit backed by equipment for collateral. Asset-based lenders care about your future prospects instead of your credit history. You may be able to get new equipment and then the lender will hand you a line of credit based on the equipment’s value. These lines often have relaxed requirements.
Invoice Credit Line
This is accounts receivable financing. It’s useful if you have customers that take a long time to pay you back. Sometimes, you can’t wait for the payment. You need to be able to draw money as necessary instead of waiting on clients to pay. The more your invoices increase, the more cash you have access to.
When it comes to lines of credit, a business owner might choose from four different options. Sometimes traditional loans are not the answer. A line of credit is more flexible, has lower interest rates and tends to be more relaxed than a traditional loan.