How can you ensure you have the working capital at hand for your business to stay running full steam ahead? A business line of credit has worked for many companies, and this option may be right for you.
How Business Line of Credit Works
The closest analog to a line of credit is a credit card. Like the limit you have on your credit card to make purchases, a business line of credit has an express amount of funds you can draw from as needed. Similar to a credit card, your line of credit may be revolving credit, which means that what you repay becomes available again for borrowing.
The Cost of a Line of Credit
A business line of credit has different fees that depend on your particular agreement. Expect these four types of fees for a line of credit.
- Origination fees: The fee the lender charges when you enter the agreement.
- Draw fees: Similar to an origination fee, this charge is a percentage deducted before disbursal from your withdrawal amount.
- Bank wire fees: A possible charge for a money transfer.
- Maintenance fees: A charge by the lender for keeping the account open if you do not use it, something like an annual fee for a credit card or maintenance fees for other types of bank accounts.
Business Line of Credit Versus a Business Loan
When deciding which credit route to take, both business loans and business lines of credit have distinct advantages. A loan is typically approved for a specific purpose. A loan can be cheaper than a line of credit, but that is not a hard and fast rule.
A line of credit can be used as you need it, and this flexibility is a huge plus. Consider a line of credit as better for routine costs or emergencies that you can pay back rapidly. Credit lines are great to float you through slow periods. An available line of credit eliminates all the work of getting approved for a loan every time you need extra funds.
It is generally advantageous to keep a line of credit and open other business loans as needed. Responsible use of a credit line improves your credit score and makes it easier to get a bigger loan at the appropriate moment.
Business lines of credit can be a strategic addition to your credit portfolio. A credit line helps you have needed working capital at a reasonable rate while helping you improve your credit score when used responsibly.
If you want to start a business and are not independently wealthy, odds are you will need a business loan. In the simplest sense, a business loan is a sum lent that can help you establish a new business, which will be repaid as the business grows.
But for a number of reasons, business loans can sometimes be tough to access. You may have a limited or non-existent business history, making lenders reluctant to offer you money. On the other hand, your business idea may be unusual or risky, leading lenders to pursue safer investments.
Still, with hard work and attention to detail, there are many ways to access business loans. Below are several important things to keep in mind as you work to secure financing.
A Great Business Plan Is Key
One of the most important steps in accessing a business loan is creating a sterling business plan. A business plan is essentially a document that lays out, in sufficient detail, how you intend to operate your business and why it will have success. It will serve as a blueprint for prospective lenders, demonstrating that you have a workable plan and can repay any loan.
In your business plan, be sure not to go light on details! You will want to have thorough financial projections and analyses, including market research, to show you are prepared for what you are getting into.
There is more than one way to fund a business and more than one means of accessing a business loan. Be sure to do your research and find your best lending options.
Starting with a local bank or credit union is usually a great idea — but there are other options. For some business, crowdfunding can work well. For some individuals, a private loan may be an option. Work to determine what will make sense for you.
Having a realistic sense of what is possible is important in accessing a loan. Don’t ask a bank for an exorbitant sum if you have no business experience. Seek out what you need, not just what you want. Demonstrate why you need a given amount of money, and work to prove it’s an appropriate amount for your idea.
Ultimately, even with limited experience, there are ways to access business loans. The tips above can help you as you endeavor to find the right loan for your new business.
Maybe after your latest marathon of home renovation shows, you’re ready to take the plunge into the home rehab market. Even if you have little experience and less than perfect credit, you can find financing through one of these loan options.
Home Equity Line of Credit (HELOC)
If you own your home, you have an excellent source for financing as you can borrow a line of credit with your home as collateral. HELOCs have great rates, and you may be able to borrow up to 85% of your home’s value. You are only charged interest on the amount of money you use, and you can withdraw money as needed, making this one of the least expensive loan options.
Investor or Partner
Combine skillsets with another person in a fix and flip business. Allocate your responsibilities and share of the profit. Search for a partner with cash and financial connections while you handle the labor and work to combine forces into a prosperous business relationship.
Personal loans might be a reasonable option if you have excellent credit and don’t need a large sum of money. You may decide to use a personal loan to supplement another financing solution. A personal loan can be preferable because you don’t have restrictions on how you use the money.
Friends and Family
If the previous loan types are not feasible, you can try to secure financial support from friends and family. You are most likely to get the best rates from a relative or close friend. You won’t have to go through the heavy paperwork of a lending institution, but you may have to sharpen your pitch skills. That doesn’t mean you should eschew a contract. You can ruin a good relationship by neglecting to clarify expectations. Clearly define a repayment schedule and how to proceed in the event of a loss.
Hard Money Loans
Hard money loans are often used for fix and flip projects. The loan can provide all the funding you need in one agreement if you plan carefully. The APR is relatively high for hard money loans, but the rate might be worth it if you can quickly flip the house. No matter the financing you choose, remember to factor in carrying costs (property expenses, such as taxes and insurance), the origination fee, downpayment, material and labor charges, and closing costs at the home’s sale.
Real estate has always been a lucrative business. Decide on your best financing alternative, and you can get in on the home-flipping market.
There are a lot of ironies when it comes to financing for startups. On one hand, qualifying for many loans requires having a good credit score and a certain amount of time in business. On the other hand, for your business to even build a credit score, you need to get some type of loan or lease. Helping your new business get through the first few years successfully is much easier when you have financing in the first place!
How can you make it through this confusing maze of rules unscathed and get the things your startup needs for success? Several types of alternative financing can help.
There are several great things about equipment loans and leases for new businesses. First, having high-quality equipment is a major boost for your company and your ability to generate revenue. This makes it easier to “play with the big boys” from the very beginning as a startup.
Another advantage is that you don’t need a high credit score or a huge down payment to get equipment with this type of financing. The equipment you want to purchase or lease takes the place of collateral required, which helps you qualify more easily. True, startups generally have higher interest rates than longtime companies, but the rates are comfortable even for small businesses.
With equipment financing and leasing, your new business can get virtually any type of equipment. This includes point-of-sale terminals, computers, office equipment, restaurant equipment, construction tools and equipment, plumbing equipment, cleaning equipment, and many other items.
Crowdfunding refers to raising small amounts of capital from a large number of “investors” or supporters. Some businesses use crowdfunding from launch and others rely on it to spur growth via specific projects. For example, you could show your followers expansion plans and set a funding goal for purchasing certain equipment.
The tricky part of crowdfunding is having a large social media following and the type of personality that can motivate people to support you because they believe in you. You’re not just selling an idea, you’re selling yourself and your vision.
Microloans are easier to qualify for than traditional loans, but you have to know how to use them wisely. Limit microloans to short-term needs you can pay off quickly, such as inventory purchases, hiring costs, and computers. These loans have higher interest rates, so they’re only to get you started until you have good cash flow.