A line of credit is considered as the most sought offer financing option for the business owners. The flexibility which these provide is unparalleled. Whereas the typical term loan gives the borrower one lump sum of cash to use – and to pay back over the time – a line of credit is thus more like a reserve pool of a set amount.
This article explains the four completely different lines of credit which small businesses need to know about.
- The traditional line of credit.
The traditional line of credit is typically meant for the experienced business owners with proven business models. Which makes sense since the credit maximums are considered as sizable, the rates are lower, and the requirements thus demand higher credit scores and annual revenue reporting. These thus come from the banks where the borrower houses his business bank account.
However when we compare a line of credit to a term loan of a similar size, a line of credit might thus have a lower interest rate and a closing cost but still it would likely also come with a substantial interest rate hike if the borrower overdraws his account or fails to repay what the borrower has withdrawn.
A line of credit thereby acts as a capital cushion and is there for him when the business owner needs it. He can spend that flexible cash on his seasonal business expenses, payroll and also other operational costs, insurance against emergencies and for sudden opportunities.
- The short-term line of credit.
The difference between a short-term line of credit and a traditional line of credit is thus more or less considered as the same between the typical short term loan and conventional bank or a longer term loan . Thus a short-term line of credit has higher interest rate , lower credit maximum , faster turnaround time and also looser application requirements .
This is generally offered by the alternative lenders rather than by the banks. The people who have lower credit scores, smaller annual revenues and newer business qualify for this credit.
- The equipment-backed line of credit.
Beyond the short-term and traditional lines of credit, these small business owners can also look into the lines of credit which are backed by certain kinds of collateral.
The asset-based lenders, however, care more about the future prospects than they do about the past borrowing history . The borrower gets some necessary equipment — a vehicle, new exercise machines, a printing press — and this equipment-backed line of credit lender would hand the borrower a line of credit based on the value of equipment.
- Invoice-backed line of credit.
The basic idea which iis behindinvoice financing which is also called account recieveable financing is that, sometimes, the customers take a long time to pay the lenders back — but the lenders generally might not be able to wait. Instead of relying on the short-term loans to cover the operating costs, or digging into the savings, the borrower can get the invoices paid right away .
An invoice-backed line of credit thus follows the same logic. The credit maximum is determined by the value of the invoices and thus the borrowers could draw a capital as it deems fit instead of relying on the customers.. And as the invoices increase, the borrower will typically have access to more cash from the line of credit as well.
If you’re a small business owner and are thinking of growing your opportunities or either for the purpose of easing your cash flow problems, then one of these lines of credit might be right for you.