Life’s twists and turns can often require an unexpected need for additional financing. Whether you’re finally ready to launch your own business for the first time or you need additional access to funds to keep your business running smoothly, you may be considering your financial options. Crown Bank is here to offer support through financial advice and funding options for businesses large and small.
With various loan options, you may be overwhelmed by what works best for your needs; perhaps consider a business line of credit (LOC). Similar to a credit card, a LOC is a set amount of money that can be borrowed up to an approved loan amount for a given period of time. As with credit cards, those who open a line of credit can use their balance as needed, only paying interest on the amount that they use, rather than on the entirety of the approved credit limit.
Business lines of credit can be used for almost any immediate funding needs, but there are both benefits and drawbacks that should be considered:
Benefits of Opening A Business Line of Credit
Ideal for temporary cash shortfalls
As your business expands, you may need to purchase additional inventory or incur additional operating expenses. These added expenses may not be feasible with your current cash flow. A LOC allows you to purchase the additional inventory you need to meet current needs and repay as your income increases or becomes more predictable.
A LOC is also helpful in the case of unexpected expenses like a leak in the roof of your business needing to replace an expensive espresso machine. These upfront costs are expensive and many small business owners may not have the immediate funding to cover these costs. A LOC allows you to make the necessary improvements, without having to cut costs elsewhere or pulling from your savings account.
Flexible options for your repayment period
A LOC typically offers lower average rates than most credit cards and you only pay interest on the money you actually borrow, not the total amount of the approved line of credit. The LOC also offers various repayment period terms depending on your credit and your needs.
Be sure to speak with a lender personally to understand the repayment options for your LOC.
Fewer restrictions than other loan options
A LOC can be used for any business needs, similar to a credit card but without the high-interest rate of the credit card. You manage your money, how you want and when you want.
Builds Lender Relationships
If you don’t have a pre-existing relationship with a lender, this may be a good opportunity to build one. Opening a business line of credit allows the opportunity to form a trusted relationship with the financial institution providing the loan amount. This relationship may benefit you in the future if you require additional financing or access to funds.
Drawbacks of Opening A Business Line of Credit
May allow for overspending
If you have a credit limit higher than your immediate financial need, you may be tempted to overspend. Perhaps you choose the higher-end items to improve your store or, you purchase more supplies than needed since you have the funds.
When using a LOC, be sure to remember that while you only have to repay what you use, this benefit only applies if you don’t actually use the entirety of the loan amount. Create a budget and stick to it to prevent overspending.
Variance in lender policies
As with any loan, business lines of credit are dependent on the lending financial institution’s policies and your relationship with them (i.e. if you’ve been with a bank for a long period of time or if you’ve newly joined).
Annual fees may apply and fees and APR tend to vary widely depending on the lender. Make an appointment with a banker to discuss these policies so you understand the nuances of your loan agreement upfront.
Applications take time
Access to funding doesn’t happen overnight. In order to borrow money from a financial institution you must first fill out an application and provide the necessary documentation and records. While these applications are dependent on the lender, you may need to provide tax statements, personal and business bank statements, profit and loss statements, business documents like articles of incorporation, etc.
The best way to ensure efficiency in your application process is to discuss it with a banker personally. Make sure when you apply, you have all the necessary documentation to be reviewed by the financial institution. You don’t want to be denied on a technicality or a missing document.
When considering opening a business line of credit, also consider what financial institution you want to be tied to for a longer-term relationship. Customer service is extremely important when making financial decisions. Opt to apply for a business line of credit from a lender that you trust and one you can come to with questions or concerns before, during, and after your loan term.
As with any type of loan or line of credit, a LOC is dependent on your goals, your credit, and your lender’s policies. Loans can be complicated, so take the time to ask questions and consider your options before agreeing to any terms you may not understand or may not be able to meet.
Crown Bank bankers are always available to discuss lending options that meet your needs and future goals. Take the time to meet with one of our bankers today and consider your financial options.