Why a Line of Credit Is Often a Smarter Choice than a Bank Loan

Whatever line of business you are in, there comes a time when everyone needs a helping hand regarding your company’s finances. Whether it is some hefty cash to invest in new equipment or a little extra to restock your inventory quickly or respond to unexpected expenses, keeping on top of your financing options beforehand is advisable, since you will probably need to react quickly when the time comes.

Businessmen shaking hands

Keeping your cash flowing through the hard times might mean avoiding unnecessary cutbacks that could influence your company’s survival in the long run. Among the most popular options for getting some extra funding are bank loans and lines of credit – but which choice is better for you?

The Many Advantages of a Business Line of Credit

First things first, you need to understand what each option means. A line of credit by private companies has many advantages for small businesses and keeps you constantly in the loop without the excessive red tape of bank loans. It is essentially a financial tool designed to function like an elevated business credit card of sorts. Unlike a bank loan, it does not provide you with a lump sum of funds, nor does it require monthly repayments that you have to keep up with. To the contrary, it offers you a certain cap of funds that you can access in order to address your business needs as they arise.

Repayment and interest evolve according to the amount you decide to draw – and your balance is revolving, which means that any credit you do not use is carried forward to the next month. As you make repayments towards replenishing the principal, namely the original capital, your credit rises again to reach the original limit, allowing you to make heftier withdrawals.

Pound coins in a heap

A business line of credit is generally very flexible and thus very popular among business owners. It is also easy to apply and get approved beforehand, while your finances are steady and you are a much more appealing client for the lender, so that you have your line of credit open when you need it – there is no time limit within which you have to use your funds, so it makes for a sound backup plan.

Besides the flexible process and the fact that you only need to pay interest on the amount you actually use, business lines of credit are also a great way to develop a standing working relationship with a particular lender.

If you use your credit wisely and demonstrate reliability, you can get your lender to increase or expand your funding when you need it most. It also allows you to build your credit rating, if you choose a lender who reports to credit bureaus on your performance vis-à-vis repayments.

The Drawbacks of Getting a Bank Loan

Bank loans also remain a popular way to refinance your business; there is a wide variety offered by banks as part of their strategy to finance businesses of all sizes – including some specifically designed for small businesses. Bank loans typically examine your company’s financial stability and availability to repay the loan in order to grant you one. This makes it significantly harder to get one, as you will typically apply for one when you are in need of money and your financial situation is not at its best.

Banks are very careful to only lend where repayment is clearly viable, so they will go through your credit record and finances meticulously and regularly require important collateral such as real estate. This means that your personal assets might need to be put up as a personal guarantee – and in the event of a default, you will need to cover the bank’s losses with them. The process is also much lengthier and requires a lot of paperwork and red tape to get approved – but provides you with a lump sum to work with straight away.

Analysing charts and Adata

One of the biggest disadvantages of bank loans is that, depending on the size and the financial ability of your business, funds are very often inadequate and the interest rates are too high for SMEs. This could lead you into a loop of lending as you need to find other funds in order to repay your loan and not fall behind on your credit rating.

There are alternative loans that are managed and secured through the Small Business Administration which offer much more favorable terms, but these are often very hard to qualify for and require businesses to meet a lot of conditions. Another catch with bank loans is that they are usually geared towards a specific purpose, so you cannot really do with them what you wish: you have to comply with the restrictions set by the lending bank that approved the loan.

All in all, even though bank loans are widely regfor dditional arded as the most conventional way to get funding, a business line of credit typically offers a more flexible way to refinance your business at your own pace.

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