If the funds requirement of a
small business fluctuates over time, a business line of credit is a good
solution. This source of finance gives you the flexibility to borrow money as
and when you need it. You are required to repay a certain minimum amount every
month but are free to pay back more than this, giving you the option to reduce
your interest costs.
What can the funds be used for? Most firms establish a business line of credit to meet
ad-hoc working capital needs. For example, a company may get the opportunity to
buy a large volume of inventory at a highly discounted price. Cash can be
immediately drawn from a business line of credit for this purpose.
This facility is also useful for
sudden expenses which were not budgeted for. Equipment in a firm’s
manufacturing unit may suffer a breakdown. A substantial amount of funds may be
required to get the machinery running again. If a business line of credit is
available, funds can be accessed immediately and used to carry out the necessary
work.
Are you eligible? Banks and other lenders have varying criteria for granting a company, a
business line of credit. But to be eligible for this facility, a firm would
usually need tobe in existence for a certain minimum number of years. Additionally,
a borrower would be required to have revenue exceeding a pre-set sum.
Online lenders typically require
a firm to have annual revenues of $100,000 or more to consider granting a
business line of credit. Banks would usually have norms that are more stringent.
Interest rates and other costs – The rate of interest available from a bank would be
in the region of 5% to 10%. Many banks also offer business lines of credit at
their prime rate + a certain markup. This can provide significant cost savings
to borrowers.
Be prepared to pay several types
of fees when you set up a business line of credit with a bank. You would need
to incur an account opening fee in addition to annual fees charged on a yearly
basis. Many banks levy an extra charge if you draw funds from an ATM.
Online lenders’ interest rates
But there is a distinct advantage
in dealing with online lenders who are also known as alternative lenders. Their
approval process is completely automated and most applications for a business
line of credit get an immediate response. It is common for funds to be made
available within a few days.
Banks, on the other hand, usually
have a paper-based approval process that can take weeks to complete. They also
require the prospective small business borrower to submit multiple documents
and reply to a number of questions.
Is a business line of credit the right choice? If your company needs to have a flexible source of
working capital, a business line of credit is the best fit. You can draw the
amount you need and when your liquidity position improves, you have the freedom
to repay the borrowed amount.
But this source of funds does
have one major drawback. It is reviewed by the lender after every six months or
one year. If your company has suffered a setback in this period, you could be
required to pay back the entire amount immediately. This could put your entire
business operation at risk.
