Businesses consistently have to deal with costs of inventory, supplies, and payroll. They also may incur various unexpected expenses from time to time. Charles Spinelli mentions that a business line of credit would be the perfect way to avail the necessary funding for emergencies, seasonal fluctuations and other short-term needs. In simple words, a line of credit is a flexible loan from a financial institution. As opposed to a traditional business loan, which provides the borrower with a lump sum of money upfront, a line of credit lets them draw funds as required, up to a predetermined limit.
Charles Spinelli marks some of the top benefits of a business line of credit
A business line of credit operates quite like a credit card, which makes it a flexible way of accessing funds. It enables business owners to withdraw the funds they need to keep their business operations running smoothly, fill cash flow voids, as well as cover unexpected or higher short-term expenses. Much like a credit card, with a business line of credit, the borrower shall pay interest only on the sum of money they use.
Business line of credit can be of two types, unsecured and secured. A secured line of credit requires a certain form of collateral, and usually provides borrowers better interest rates and attractive loan terms. On the other hand, as an unsecured line of credit is not backed by any collateral, they may come with higher interest rates than a secured line.
There are many benefits associated with business lines of credit, including:
- Improved cash flow: Seasonal downturns and past-due invoices can lead to cash flow issues in a company. For any business owner dealing with an unexpected expense, it can be a huge challenge to pay bills, make investments into the business and pay the employees on time. A business line of credit helps improve cash flow by providing business owners with a pool of funds to pull from whenever they face these situations. Access to the necessary funds in time makes sure that a business owner does not have to pause operations or shut their doors for good.
- Easily accessible and building business credit: Getting a bank loan is not easy for everyone, especially if they do not have a great credit rating. In most cases, getting a business line of credit is much easier than availing a typical bank loan, especially for startup founders whose credit rating might not be too high. Moreover, by responsibly managing a line of credit, a business can actually strengthen its credit rating. A higher credit score can pave the way to better terms on borrowing more funds down the line, and can be good for the overall financial health of a company.
- Cash on demand: Unlike a traditional loan, a business credit line enables people to source funding before their business actually needs it. Due to the cynical nature of the business landscape, many entrepreneurs would want to borrow funds in order to take care of the distinctive short-term needs of their enterprise. Being able to access funds on the credit line at any time can help people to keep their business running in a smooth manner, day in and day out.
According to Charles Spinelli, a business line of credit is also quite an effective way to build a relationship with lenders. It provides borrowers with the opportunity to demonstrate that they can responsibly manage credit, which may ultimately lead to credit line increases or make it easier to renew the line as the draw period ends.