A line of credit can be a huge help to a small business. The security it offers frees you to use your capital in other ways other than as a hedge for emergencies. By being flexible, you limit what you have to pay back in interest since you only take out what you really need. Many people are familiar with working capital lines, but there are other types which you should know about if you own a small business.
Working capital lines of credit typically help small businesses pay for their expenses while they wait for their customers to pay them. For example, utility bills and worker salaries can be paid completely and on time by drawing from the line of credit while you are still waiting on your accounts receivables.
When your accounts receivables are paid, you can then pay back what you drew from the line of credit along with the interest and other fees. This line of credit has a limit, and if you repay what you drew then you can still get access up to the limit of the line of credit. So if you have a $10,000 limit and drew a thousand dollars, you only have $9,000 left on your line of credit. But when you pay back the thousand dollars and the interest, your line of credit goes back to $10,000.
This type of line of credit is usually available for an entire year, after which it can be renewed if both parties are amenable. The interest rate is pegged at a specific percentage over a published rate (such as +1% to +6%) like the prime rate.
Getting a business working capital line of credit is pretty much like buying a car through a loan. In business, you may be extended a line of credit to purchase equipment and other assets. The main difference between the working capital line is that it’s non-revolving. If you have a $100,000 line of credit for asset purchase and you spend $10,000 on equipment, you only have $90,000 left on your line of credit even if you repay the $10,000 you drew.
In general, the interest for this type of line of credit is fixed. But sometimes it may be pegged at an adjustable rate.
We’re not talking about large construction projects here. For example, you may want to make improvements in the space you’re leasing for your restaurant. With a construction line of credit, you first have to pay for the construction out of pocket. Once the lender determines that the construction is complete, then your expenses may be reimbursed. This is also a non-revolving line of credit.
As you can see, working capital lines of credit are not the only lines of credit you can use in order to nurture your business and allow it to grow. If ever you’re approved for a line of credit, try to see which types are available so you can increase your chance of making your business a success.
For more information about business capital lines of credit, please check out www.neebocapital.com.