For any business to grow or emerge into the world, raising funds is the first thing that comes into the mind of an entrepreneur. There are times in a business when the sales are low, supplies are required on an urgent basis or it can be anything, the possibilities for a funds emergency in a business are endless.
So, what to do in such a scenario? While there are conventional ways to raise funds like bank loans, and credit cards, there’s another way businesses raise money, which is the Business Line of Credit.
Business Line of Credit vs. Bank Loans: Key Differences
A business line of credit is a flexible financial possibility that allows a business to borrow up to a fixed credit limit, and withdraw funds as and when required, and repay them over time. The concept is very similar to a credit card, interest is only paid on the amount borrowed, not the total credit limit.
Now, many might get confused trying to differentiate between bank loans and business line of credit, or even which is suitable for your business. To understand these concepts better let’s understand the basic difference between these two funding models.
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Structure of the Loan:
Bank Loan: A lump sum is provided upfront with a fixed repayment schedule. The loan is paid off over a set period, typically in monthly installments.
Business Line of Credit: Offers a revolving credit limit, allowing you to borrow, repay, and borrow again as needed, providing ongoing access to funds.
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Purpose and Usage:
Bank Loan: Ideal for specific, large expenses such as equipment, property, or business expansion, where a fixed amount is needed for a set purpose.
Business Line of Credit: Best for short-term, flexible funding needs like managing cash flow, inventory, or covering operational expenses on an ongoing basis.
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Interest Rates:
Bank Loan: Interest rates are typically lower and may be fixed or variable, based on the loan terms and the borrower’s creditworthiness.
Business Line of Credit: Interest rates tend to be higher, and you only pay interest on the amount you borrow, not the entire credit limit.
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Repayment Terms:
Bank Loan: Repayments are fixed and predictable, often on a monthly or quarterly basis, until the loan is fully paid off.
Business Line of Credit: Offers flexible repayment options, with only minimum payments due each month on the borrowed amount, and no fixed repayment schedule.
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Approval Process:
Bank Loan: The application process can be more detailed and time-consuming, requiring substantial documentation and taking several weeks to months for approval.
Business Line of Credit: Approval is generally quicker with fewer requirements, especially for unsecured lines, and funds are accessible more rapidly once approved.
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Collateral Requirements:
Bank Loan: Secured loans typically require collateral (e.g., real estate or equipment), though unsecured loans may be available at higher rates.
Business Line of Credit: Secured lines require collateral, while unsecured lines don’t, but the latter often come with higher rates and lower limits.
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Flexibility:
Bank Loan: Less flexible, as the amount must be used for the specified purpose and the repayment schedule is fixed.
Business Line of Credit: Highly flexible, allowing funds to be used for various business needs, and borrowers can access funds multiple times within the credit limit.
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Credit Limits:
Bank Loan: A fixed loan amount is determined at the outset, and once the loan is disbursed, the amount cannot be changed.
Business Line of Credit: Provides a credit limit that businesses can borrow against, and the limit may be adjusted based on the business’s financial performance over time.
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Impact on Cash Flow:
Bank Loan: Fixed monthly payments can put strain on cash flow, as the business must repay the loan on a set schedule.
Business Line of Credit: More flexible with cash flow, as you only pay interest on the amount used and can borrow and repay as needed.
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Ideal Use Cases:
Bank Loan: Suitable for large, one-time expenses or long-term investments where businesses need a lump sum of capital.
Business Line of Credit: Best for ongoing or short-term funding needs, such as managing seasonal fluctuations, covering gaps in cash flow, or addressing emergency expenses.
Types of Business Line of Credit
Now that we have differentiated bank loans with business line of credit, let’s dive into the types of business line of credit, mainly divided into Secured and Unsecured line of credit.
Secured
Usually, for secured business line of credits, the lender looks at your cash inflow and outflow, sometimes even asks for a collateral asset, like real estate or a deposit.
This is much safer for borrowers as the rate of interest is lower and the borrowing limit is also comparatively higher. This is because the lender has collateral assets to recover the amount in case of missed repayments.
Unsecured
When the borrower is looking for instant cash flow and does not have any collateral assets to secure their credit, an unsecured business line of credit comes in handy. Even though the credit limit is comparatively lower with higher rate of interest, it totally depends on the urgency of a business to avail this line of credit.
How to Get a Business Line of Credit?
What is one supposed to do when they must avail themselves of a business line of credit? The following steps can be followed to ensure a smooth application:
- Assess your business needs: This means getting a quotation of your requirements and figuring out how much funds are necessary or will be required in a certain amount of time.
- Check your creditworthiness: This step involves checking your credit score, personal and professional, your business’s financial health and a rough estimation of the money your business might make in the next financial year or so.
- Choose the right type of business line of credit: Be it secured or unsecured, according to your requirements and assets, make a choice of the type of business line of credit you want to avail.
- Reach lenders: There are different types of lenders that are available in the market, like traditional banks, online lenders, credit unions or if you have personal connections, you can explore alternate lenders too.
- Application: Once you have successfully completed the above steps, you need to fill out the application, meet the lender’s criteria and once that is done, you can avail yourself of your business line of credit.
Conclusion
For each business, getting a line of credit is beneficial for the times when funds are urgently required. If you are looking for a secure business line of credit, then The Accredited Group is an option to consider.