Most businesses and companies depend on business loan as means of getting fund for their business ideas and plans and this is common means of funding for most. During the economic collapse in the United States, banks started placing limitations on their business loans. This birthed alternative means of business funding.
Online bank loans started permitting businesses and companies to have extra options of funding for running their business. Line of credit is one of these means of extra funding provided by the Internet banking loans.
A business line of credit works similar to a credit card. It is a revolving account, and a different type of business loan.
Conventional business loans gotten from banks entails you borrow certain amount of money. Interest is charged on the total loan amount by the bank, and you commence making monthly payments over an agreed period until you payoff the whole loan borrowed.
Once the loan is exhausted, there are no additional funds available. You will need to send application for a new business loan if the need for extra funding is needed for your new company.
Having a business line of credit lets the bank approve specific amount of money for you. Unlike the usual loan you know, business line of credit only let you withdraw money when they’re actually needed, then interests are charged on only the withdrawn money.
The way and manner borrowers pay back the withdrawn money is varied. The terms of repayment are dependent on the financial institution offering you a business line of credit service; but the normal payment amount is a monthly something. As you make a repayment, the bank adds it to the available amount existing in the line of credit. The amount only reduces when you make a withdrawal.
Ensure you do a research before picking a line of credit service. Remember, there are any ‘fishes’ in the sea.
Traditional Business Loans vs. Business Line of Credit
Deciding between a business loan and a business line of credit is dependent on the amount of money you actually need, and what you need it for.
A business loan:
- Provide a stable, monthly payment plan that is predictable
- Provide a one-time piece sum payment
- Includes early repayments penalties and closing costs too.
- There are fixed rates for every repayment made.
Business Line of Credit
This can be likened to credit cards via the way business money is accessed. Here are what to expect from a business line of credit:
- A draw fee whenever you borrow against the credit line.
- Calculated monthly payments based on how much you borrowed.
- A set amount of funds to borrow against.
- Few closing costs. At times, no closing cost.
- Interest rates are often variable. There’s no primary rate.
- Tractability to borrow as much funds as you need.
Whether business loan or line of credit, you will need a good credit score, solid cash flow, and a robust fiscal vertical.
Another awesome feature of line of credit is that, amounts available for borrowing can be increased. If you’re looking for how to increase your line of credit, we will teach that in the next post we will publish.