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.