Advantages of a Business Line of Credit over a Business Loan

 

Choosing business Finance and working capital products can sometimes be a daunting and difficult task. We are a firm believer that most working capital needs are best served by a business line of credit over a business loan. Here are some points to consider:

Cash flow management: First question a business owner needs to answer is weather the need for working capital will fluctuate or not. If the answer is yes, then a business line of credit is the best option. The business owner is able to draw funds on an “as needed” basis rather than having a lump sum of cash sitting in a business checking account.

Interest savings: By not having a lump sum of cash sitting in a business checking account, the business owner saves money on interest payments. With a business line of credit, the borrower only pays interest on funds that are drawn from the line of credit. For example, if the business has immediate working capital needs of $50,000 but will soon need $100,000, the business can only draw $50,000 and pay interest only on that draw. If the business obtains a term loan in the amount of $100,000, they will pay interest on the unused $50,000 while it isn’t being utilized.

Less paperwork: A business line of credit is an open ended account. This means the borrower may draw on it and repay the borrowed amount as much as they wish up to the limit assigned by the lender. Once paid back, no additional applications or documentation is required to draw on the line again. With a business term loan, the business and the owner’s credit have to be underwritten again. Also, there’s no guarantee that the loan will get approved when re-applied for. This saves the business owner valuable time to focus on operating and growing his/her business.

Origination fee savings: Many fixed term business loans charge an origination fee to the business owner. These fees range anywhere from 0.5% to 5%.  Once the loan is repaid, if the business owner needs additional funds and applies for another loan, he/ she will have to pay another origination fee. In a case where the business owner opens a line of credit, no origination fees are charged. Most business line of credit products come with an annual fee. This fee ranges from $100 to $250 depending on the size of the line. Some business line of credit products will have a one-time set-up or underwriting fee but often times, the open ended term

more than makes up for the set-up fee. The overall cost is still much lower than paying thousands of dollars in loan origination fees on traditional business loans every time a loan is needed.

Flexibility: Get a business line of credit offers a greater overall flexibility over a term loan with flexible repayment options. Most business line of credit products have an interest only payment option. This keeps the monthly minimum payment amount low. This advantage is especially useful during times when business sales are low. Having additional limit also allows the business owner to be more nimble and draw funds on demand to take advantage of new business opportunities with a short time notice. For example, if you’re in the distribution business and one of your manufacturers calls and offers a certain item that they are looking to liquidate at 50% discount. The only catch is you have to be able to purchase $20,000 worth of product within the next 3 business days. You’ve carried this line of product of many years.  You have the space in your warehouse to store the product and you’re confident that you can sell the product to your clients at the same price that you previously sold it for. Having a line of credit with $20,000 left on it would allow you to take advantage of this great opportunity with ease. Having a term loan would leave you scrambling to come up with the $20,000.

Can your business use a revolving line of credit? Click here to see if you qualify or speak to one of our consultants at (630) 376-6063.http://midwestcorporatecredit.com/how-to-get-business-credit/