The One Financial Tool Every Business Owner Needs in 2019

The One Financial Tool Every Business Owner Needs in 2019

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If you consider yourself a cutting-edge business owner, you’ve probably invested in your share of software solutions, tech tools, and financial advice. But there’s one tool you can use to help protect and grow your company, even when cash flow is tight.

That’s why the solution for forward-thinking entrepreneurs who want some flexibility to roll with any changes to their business is one that gives them as little – or as much – cash as they can borrow. There is just one financial tool that does this well: the business line of credit.

What’s a Business Line of Credit (LOC)?

Differing somewhat from a traditional business loan, and working more like a credit card, a business line of credit gives you access to a credit limit that you can borrow against at any time, usually without providing collateral or security.

Many traditional banks offer some kind of line of credit, and these are usually sought out by companies who want a more flexible alternative to a regular loan. The line of credit assumes a couple of things:

1. You can manage your own borrowing power and don’t need to be limited to a one-time disbursement of funds.

2. You plan on staying loyal to a lender for many years, possibly returning to this credit line over and over during the course of your business.

Once approved, you can access the amount of cash you want. Unlike a loan, the full amount of the approval doesn’t have to be taken at once – or ever.

Like a business credit card, the borrowing limit is there for when you need it, but many businesses don’t reach their credit limit. You can pay the minimum monthly payment amount or more. Interest accrues on the amount you have outstanding, and you are free to borrow money again as soon as you repay it, up to the maximum credit line.

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A business line of credit isn’t subject to the same restrictions that a business loan typically is. You can use it for virtually any need your business has, accessing the funds via an account check, credit or debit card, or cash from a teller.

Unlike a typical credit card, interest usually starts accruing right away. There may be an annual fee or additional charges. Be sure to inquire about what it will cost to borrow money before you apply.

Benefits of a Line of Credit

Interest rate

One of the perks of using a line of credit is the interest rate. While most accounts use a variable interest rate, based on the Federal Reserve’s prime rate, the APR is traditionally lower than that of a business credit card. There is usually no zero-percent intro rate, unlike many business cards, but your approved rate may stay the same for the life of your repayment (provided Fed doesn’t raise prime rates.)

Faster turnaround

Since you don’t usually have to provide collateral, the approval process may be much simpler and faster than a regular loan. Loan amounts range from a few thousand dollars to $100,000 – or more! The better you can demonstrate your ability to repay, including sales figures and profitability reports, the more likely you are to get a higher limit with lower interest rates.

Money when you need it

Another great benefit to the business line of credit is that it’s there when you need it. For the seasonal business, for example, a line of credit can help you keep up with operating costs and supply expense until your more profitable months. Provided you pay back what you owe as required by the terms of your credit account, you can repeat the process of borrowing when you need extra liquidity and repaying more aggressively when your revenue grows.

Establish business credit

Responsibly using a line of credit is also an effective way to boost your business credit score. If you have never gotten approval for a loan for your business in the past, opening a line of credit can do much good in helping you establish business credit.

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How Can a Business Owner Qualify?

Depending on the lender, you may need to gather your personal and business tax information for the past few years, your bank account information, profit-and-loss reports, and a record of your assets, debts, and outstanding customer invoices. Depending on where you apply, you may be able to do much of this online.

An in-person bank appointment could take longer, but traditional bank chains are generally more competitive with rates and offerings, so weigh your priorities when choosing where to apply.

If you don’t get approved right away, inquire about if they have a way to secure the line of credit with personal or business assets. Sometimes, just offering up some collateral is enough to get the account opened.

After a year or more of satisfactory payments, some banks may loosen up collateral requirements. One other thing to note is that banks will continue to check your creditworthiness annually, adjusting your credit terms if you fail to meet their standards.

Taking on too much other debt, for example, could be reason enough for a bank to close your account or significantly raise your interest rate. The best way to avoid having this happen is to keep tabs on your personal and business credit scores to ensure you remain within the acceptable range for your particular line of credit.

How fast do you need your cash?

While approval times vary, many lenders can get you a preliminary approval (also known as a pre-qualification) in minutes. Look for banks that accommodate online applications and offer quick response times if you’re seeking funds fast.

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