A business line of credit (LOC) is an agreement between lender and borrower, by that, a borrower can borrow a certain amount of money within the fixed limit set by the lender. The borrower is allowed to withdraw and deposit any amount of money until it reaches the credit limit.
In a business line of credit, you don’t need to borrow a lump sum amount of money at once, and also you have to pay interest on the borrowed money only.
For start-ups, it hard generally to qualify because you need to show the last 2 years of the company’s balance sheet to get the approval. It depends from bank to bank the process of qualifying.
Earlier the business line of credit was not approved by the bank or lending institution, so SBA decided to launch a program. They launched SBA (7a) Program under which they force banks to give money to small businesses under their guarantee. So, what are the advantages and disadvantages? The company Small Business Capital lets us know more about it.
Advantages of Business Line of Credit
- It improves the cash flow
In small business, there is a shortage of cash. And the business owners can’t take the right decision because of the negative cash flow. Where business line of credit comes as a boom. It improves the cash flow system in a business. Many businesses shut down because there is not sufficient cash flow.
Thus, line of credit can saves many businesses by fulfilling the sudden need of cash in the business.
- Built in Flexibility
It is one of the great fund, if you are considering flexibility. Borrowers have the right to withdrawal any amount within the credit limit and the rate of interest will only be applicable for that. Also, the time period isn’t fixed, you can pay the whole at once or could pay it monthly in small amount.
Because, of this the line of credit is also called evolution of loan.
- No fixed repayable amount
There is no fixed repayable amount, the amount depend upon the user. The user can pay the whole amount at once or pay it monthly in small amount.
Because, of it the business owner’s don’t have to be under pressure of paying debt and thus their peace of mind will improve.
- Discipline Payment Improves credit Score.
Making payment of the dept in time, will help you to increase the credit score. A borrower with good credit score will be eligible for applying for higher credit. A higher credit means, you now can borrow more money through the business line of credit.
Also, having a good credit score will help you to get easy approval for your next loan.
- No need to apply for multiple time-
Once, your application is approved, you can withdrawal money multiple times without submitting any document. This it gives you a way where you could be free from paper work unlike traditional loan where you need to submit document every time.
- Low rated of Interest
The rate of interest is variable, and it also depend whether you have opt for secured or unsecured business line of credit. Generally, secured line of credit have lot rates of interest, but you have to submit collateral to your bank, but in unsecured line of credit you don’t have to submit collateral to the bank but the rate of interest are high.
The rate of interest for secured line of credit is 6% approx., which changes from time to time.
Disadvantage of Business Line of Credit
- Extra Charges
With every time you withdrawal money, a charge is taken from you. This is very annoying because, you have to pay interest fee and extra charges also. However, this charges is little but paying it every time togethers makes it a big amount.
Also, you need to give bank a maintain fee for your account. It doesn’t depend whether you have done any transaction or not it is compulsory for every account holder for the business line of credit to pay a maintenance fee.
- Overspending
Often, it is seen whenever we required money and there is a shortage of money. We borrow the money and buy. In this way, we are overspending that what we have to spend according to our income. Thus, this is the similar problem we face with the credit card.
So, you have to be conscious on your spending.
- Negative Credit Score
There are rules and you have to follow rules to maintain a good credit score. If you failed to do so, then there will be a negative effect in your credit score. Things like late payment etc are consider to calculate the credit score of yours.
And having bad credit score, will effect in you application, you application of line of credit may be disapproved. And, any further loan from this institution shall not be granted seeing the negative credit score.
What is revolving and non-revolving line of credit?
A line of credit is generally revolving, where borrowers are allowed to replay the debt and again borrow with the existing application.
Whereas, in non-revolving line of credit the application is dead after one time of repaying debt.
