When you own your own business, cash flow problems arise from time to time. It may not be serious. Perhaps a supplier needs paying before your clients have made their payments? Or perhaps you are expanding and need quick capital to make the one-off payments associated with opening a new facility?
When these situations arise, a line of credit is a useful tool to ease the financial burden. Unlike business loans which typically require businesses to disclose what they will be spending the money on, lines of credit can be used at the owner’s discretion. Lenders often charge interest on the credit used, but once it has been paid back, it can be used and reused endlessly.
A Business Credit Card
Traditional lenders like banks typically offer businesses a line of credit in the form of a business credit card. They work exactly the same way as personal credit cards, meaning your credit score will determine your eligibility. However, unlike typical credit cards, business credit cards typically grant the user more perks.
The best thing about business credit cards is that they are an unsecured line of credit. This means you do not have to put any part of your business, real estate, or property up as collateral. There are also flexible repayment options, much like a personal credit card.
Asset-Backed Credit Lines
Asset-backed lines of credit are great for businesses without a strong credit score. The lenders provide credit based on the assets your business is able to put up as collateral.
Your collateral could be invoices, equipment, or vehicles. If you are using the credit to purchase new equipment, the lender could maintain a claim of ownership over the equipment until you have paid off the line of credit in full.
These types of loans are perfect for businesses suffering from cashflow problems due to unpaid client and customer invoices as the invoices themselves can be used as collateral.
Real Estate Lines of Credit
A real estate line of credit for a business is similar to an individual home equity line of credit. The lender will extend a line of credit using your real estate equity as collateral. Either your business real estate or personal real estate can be used as security in real estate lines of credit.
It is possible to get a real estate line of credit without using your property as security, however, you will still need to show that you have a strong FICO score. This line of credit is typically extended to businesses which flip houses as it allows them to remain active without having to wait for properties to sell before capital becomes available.
Short-Term Alternative Lines of Credit
For start-ups that don’t have a strong credit score or a wealth of assets at hand to offer up as collateral, there are short-term alternative lines of credit. Alternative lenders often provide swift approval and don’t require an extensive credit history
Short-term lines of credit can come with higher interest repayments. Be sure you know the full cost of any short-term alternative lines of credit.