February 05, 2019
How to Choose the Right Business Line of Credit
As with any kind of loan, however, receiving a line of credit comes at a cost. Before applying, it's crucial to consider how much money your business needs, if you'll be able to meet the repayment terms, how it'll affect your operations. In this post, we’ll explain a few factors to consider before applying for a business line of credit, so that you can be well-prepared!
5 Tips for Entrepreneurs That Want to Choose a Business Line of Credit:
1. Secured vs. Unsecured Lines of Credit
If you're considering a line of credit to sustain your business, you'll first need to determine if you want a secured or unsecured line of credit. To apply for a secured line of credit, you must submit some form of collateral that the lender can seize if you're unable to fulfill your financial obligations. This collateral could be real estate, equipment, or inventory, just to name a few examples. If you're a new business, this might not be possible. Or, you might not be willing to risk having this collateral seized if you can't repay your balance. However, a secured line of credit can be easier to qualify for, especially if your credit scores are low. In comparison, an unsecured line of credit won't require collateral, but this makes it more difficult to qualify for. The lender will likely consider your business's annual revenue, personal credit, and business credit. If you're unsure of what your credit scores are, you can view your business credit report through Experian, Equifax, and Dun & Bradstreet, while personal credit scores are ran through Equifax, Experian, and TransUnion.2. Interest Rate
The most important aspect when weighing loan offers is cost. Interest typically starts to accrue as soon as you borrow against the line of credit limit. That means you should pay extra attention to the APR that the lender is offering. Some small business owners may be eligible for a line of credit backed by the U.S. Small Business Association through its CAPLine lending program. As with all SBA lending programs, interest rates on CAPLines are capped at a set percentage above the prime rate. Still, it's important to note that SBA loans are typically available only to moderately established small businesses that have exhausted all other financing options.3. Amount
The amount you intend to borrow against the line of credit should also be a factor in whether to accept an offer. In fact, your business may need a different financing product entirely, such as a term loan, cash advance, or credit card. For example, if you intend to borrow a large sum that you don't expect to pay back quickly, a small business loan could be a cheaper option. Ultimately, it's important to consider how much money your business needs. While it might be enticing to pursue a higher credit limit, if your business truly doesn't require it, it could be a detriment to your business. When people have access to excess financing, they can be tempted to overspend.