A line of credit can help you manage your cash flow. Before revenue arrives, you can buy inventory and pay expenses, and you can cut costs by only taking what you need from a cash reserve. It isn't easy to forecast borrowing costs. The interest rate on a business line of credit can range from 5% to more than 20%. Find out what lines of credit are and how to get one for your company.
What Is a Line of Credit for a Business?
A line of credit is a bank account from which you can withdraw funds as needed. When a lender accepts your application, they set a credit limit for you. Up to that limit, you can use almost any amount of the credit line. Since lines of credit are revolving loans, you usually have the option of repaying your debt, keeping the account open, and repeating the process if you need to borrow money again in the future.Rates for Lines of Credit
Although advertised rates are always low, the amount you pay depends on your company's characteristics as well as the type of lender you use.Pros
- Cash flow flexibility has improved.
- If you pay off your debt quickly, you'll pay no or very little interest.
- Assists with unplanned expenses
- There are a variety of lending options to choose from.
Cons
- High-interest rates could be applied to your balance.
- There's a chance your credit line will be reduced or eliminated by your lender.
- For start-ups, the terms are unfavorable.
- If revenue drops, there's a chance of going into debt.
Explained Advantages
You can pay for expenses as they arise and then repay your line of credit when your receivables are collected. You can prevent paying interest on your credit card if you collect receivables before payments are due. When you need a line of credit, you can get one allowing you to cover unexpected costs such as equipment repairs quickly. Business lines of credit are available from a variety of financial institutions.Explaining the Drawbacks
If your credit isn't great, interest rates can be high, so shop around for the best deal. Your lender has the right to cancel credit lines at any time, and they may require periodic financial reports from you to decide whether to keep your line open. If you overspend on your credit card or aren't prepared for revenue drops due to seasonal fluctuations or economic circumstances, you could end up with more debt than you can handle. You should be aware that a line of credit could be revoked at any time. Save some money in a separate account for unexpected expenses.What Factors Go Into Calculating Your Rates?
A number of factors influence rates on business lines of credit. In the end, the lender's assessment of the risk associated with your loan is what matters. In general, they will consider the following factors:- Your credit background
- Your loan's advantages
- Describe your company's characteristics.
- The broader economy's interest rates
Lines of Credit: How to Get Them
Borrowers' newest options include online sources and fintech companies. Banks, investors, individuals, and other sources of funding support these services. On business lines of credit, they frequently offer low-interest rates. P2P lending sites and marketplace lenders that specialize in business loans fall into this category. Don't forget about "traditional" financial institutions, which have a long history of extending credit to businesses. They're still a viable option, particularly if you already have a business relationship with one of these institutions. If you start a business checking account and a merchant account with a bank or credit union, you may be able to get approved and receive a reasonable interest rate. Tip: If your creditworthiness is difficult to prove, local credit unions are more likely to get to know you and your business.Alternative Information Sources
There are a few other ways to fund your business. Credit cards and SBA loans, for example, can come in handy in certain situations.Credit Cards for Businesses
Business credit cards are known as "revolving credit." They are, however, technically credit lines that are simple to obtain approval for. Credit card interest rates and fees are typically high, with an average APR of around 20%. You may be qualified for special offers and teaser rates, but don't fall into the trap of carrying a balance and paying double-digit interest over time.Loans from the Small Business Administration
SBA-backed loans are a good option if you're particularly concerned about interest costs. Private companies such as banks, credit unions, and online lenders make the loans, but the US government backs a portion of them. As a result, when they approve them, lenders are less willing to take a risk. Interest rates on SBA lines of credit differ by lender and are determined by the criteria mentioned above. On the other hand, the SBA sets maximum spread limits for lenders. Lenders can charge 4.5 percent to 6.5 percent for SBA Express loans above Prime. When compared to credit card rates of 20% or higher, the extra effort of applying for an SBA loan becomes more appealing.Selected Lenders' Rates as a Sample
Are you curious about the fees charged by some of the most well-known lenders? You'll find a variety of options below, but they may not be the best fit for your requirements. Shop around to different lenders, including small banks and credit unions in your area, to make sure you get the best deal possible. Keep in mind that the cheapest advertised rates are only available to borrowers in the best financial position, which varies by lender. Fundera is a web-based service that connects small businesses with a number of different lenders. Credit line rates range from 7% to 25%, with rates near the lower end of your credit being good. Note that because there is no centralized database of rates (due to the unique characteristics of each business and the various lender offerings), you must contact lenders to obtain figures that are relevant to your situation. Kabbage is a tech-based lender that offers short-term credit lines. Pricing is expressed as a "monthly Fee Rate" ranging from 1.25 percent to 10%. If you plan to borrow year-round, you'll need to look at total fees over the course of the year to calculate an annualized rate. Bank of America is a traditional "big bank" that provides business credit lines, including SBA and conventional loans. Advertised interest rates on unsecured lines of credit are "as low as" 4.50 percent. The rate could be as low as 3.75 percent with collateral for prime borrowers. Lendio collaborates with a variety of companies, including online lenders and traditional banks. Rates range from 8% to 24 percent APR, depending on creditworthiness and other factors, as you might expect from a wide range of sources.Credit Lines: Some Final Thoughts
As you evaluate lenders, look for lenders who prefer borrowers who fit your profile, such as companies with similar revenue, length of time in business, and credit scores. Keep an eye on any additional fees that will increase the total cost of your loan. Some lenders charge you a fee for each withdrawal, while others charge a monthly maintenance fee—and still, others don't charge you anything at all.