10 Reasons Small Business Owners Should Take Out a Line of Credit
Finding the right funding for your small business needs can be tough. There are so many options to choose from. Lines of credit (LOCs) are perhaps the best option for small business owners. Here are 10 reasons why small businesses can benefit from a line of credit over a loan.
1. You have quick access to your cash.
Unlike a loan, a line of credit allows you to draw funds when you need it, rather than taking out one lump sum from the start. This is especially true with lines of credit that are powered online. When you’re in a pinch and you realize you need working capital, the ability to hop on a computer and initiate a loan from your available funds is priceless.
2. You pay back only what you’ve used, not the total amount approved.
Think of a line of credit similarly to a credit card: a lender gives you a line of credit, which you have access to whenever you need it. Let’s say you want to renovate your store. You estimate the total costs of being $35,000, and you’re approved for a line of credit for $40,000. However, once you begin the renovating process, you find that the costs are much lower than expected (let’s say, only $20,000). You can take out just that $20,000, and pay back the interest on that amount, not the $40,000.
3. Cover your expenses anywhere, anytime.
With a line of credit, you can cover any unexpected expenses or any upcoming expenses you know you’ll need help with. Since you are not required to initiate a loan for the entire amount you are approved for, the rest of those funds are sitting there ready for you when you need them. This benefit allows you have the comfort and flexibility that traditional bank loans don’t offer.
4. Your line of credit can be unsecured.
Unsecured loans are a lot less risky for you and your business, and your credit score really comes into play on getting an unsecured loan. With an unsecured loan, you’re at less risk should you default on your payments. Defaulting only increases your rate in an unsecured loan whereas, in a secured loan, the lender is able to seize your assets (personal, business or both) in order to receive what they’re owed.
5. Cover those in-between costs.
When is the cost is too much to throw on a credit card but not large enough to justify taking a loan out, LOCs are great for covering those in-between amounts. For example, if you need to do maintenance on your truck for your company, it can sometimes be pricey. In some instances, your credit card wouldn’t provide enough, but the cost doesn’t warrant taking out a loan. That’s where LOCs come into play. See how much the bill is and take exactly what you need.
6. Build your business’s credit.
If you’re looking to improve your business’s credit score, a line of credit can help you do so. Making your payments on-time reflects positively on your score and can help you receive a larger line of credit in the future.
7. Separate personal and business expenses.
One issue many small business owners face is keeping that divide between their personal expenses and their business expenses. With a line of credit dedicated to your business, you can smoothly create and track business expenses.
8. Help your short-term goals.
A line of credit can be used multiple times and is something you can get approved for before you need it. It doesn’t serve one specific purpose. A line of credit is great used as a short-term solution for different things such as marketing, renovations, buying inventory or even covering payroll.
9. Find lower interest rates.
Especially when you’re starting a new business, finding an affordable interest rate is crucial to all business owners. Lines of credit tend to carry lower interest rates as they aren’t interest-rate driven (unlike loans). However, these rates tend to be variable.
10. Some LOCs are revolving.
The benefit of having a revolving line of credit is the ability to use it as many times as you need. These are not one-time loans. For example, let’s say you pull your entire credit limit. As you start to make your payments on that loan, the cash becomes available to you again. This is a great option for small businesses because it provides continued working capital for the needs of your growing business.
Funding your small business is always necessary but not always easy. Fortunately, a line of credit can make the process and your access to cash much simpler and give you better options for your business.
Kabbage is a small business line of credit provider that quickly connects small business with capital. Our technology platform reviews data generated by dozens of business operations to instantly understand a small business’s performance and deliver fast, flexible funding entirely online.