The Benefits of Using Business Lines of Credit
As a business owner, you’re probably focused on growing your company. To do so, you need access to capital, which likely means a loan.
There are many types of loans, but not all of them may fit your needs, especially if you’re a smaller business. Term loans, although good for home and vehicle purchases, don’t always offer the best deal as commercial financing. Instead, you may consider the benefits provided by lines of credit.
You Don’t Risk Collateral
Business lines of credit are usually unsecured, which means you don’t have to offer anything as collateral. Term loans are almost always secured with collateral, which requires putting assets at risk. Although you may not plan to default, unforeseen circumstances may interfere with your ability to pay your debts. In that case, you’d lose your assets, setting you back drastically. With an unsecured line of credit, you don’t have to worry about losing collateral even if you default.
You Can Access Funds When You Need Them
If you choose a term loan, you get a lump sum at the beginning. That means you have to be very careful about how much you apply for. If you misjudge and get a loan for more than you need, then you have a bigger debt than necessary. On the other hand, if you end up needing more funds later, you’re out of luck.
A line of credit allows you to “draw” on the loan when you need it, up to a total amount. That means that if you have a new opportunity, you can easily get the funds needed to take advantage of it.
You Only Pay When You Owe
Interest only starts accruing when you draw on the line, and it’s calculated based on the total amount you have drawn. Term loans, on the other hand, start accruing interest immediately and are calculated using the remaining principal. By using a line of credit, you can effectively manage your monthly payments and keep you debt at a minimum by only using what you need when you need it.
You Can “Reuse” the Loan
One of the best advantages you get with a line of credit is the ability to “reuse” the principal. When you repay the principal previously drawn, that amount becomes accessible once again. Most lines of credit also remain open for a specific amount of time as detailed in the loan agreement, which means they don’t close automatically even if you pay off the entire amount owed. You can therefore use the line again and again for the duration of the loan agreement.