Rather than financing your business with a loan, you may want to use a line of credit. You can use it to cover the cost of equipment, inventory, materials, utilities and other expenses. A line of credit is essentially a revolving credit account. You can repeatedly draw money from the line of credit as long you stay under the limit set by the lender. As you pay down the line of credit, you’ll have more money from which you can draw. But there are several things you should consider when applying for a line of credit.
6 Things to Consider When Applying for a Business Line of Credit
#1) Financing Needs
You should consider your business’s financing needs when applying for a line of credit. In other words, how much money will your business need? A line of credit is a form of debt. You can borrow money from a lender, which you’ll have to repay. Like with other forms of debt financing, you should consider how much money your business will need when applying for a line of credit.
#2) Secured vs Unsecured
There are secured lines of credit, and there are unsecured lines of credit. Secured lines of credit are backed by collateral. If your business has little or no credit, the lender may require you to use collateral. You won’t be able to obtain an unsecured line of credit. Instead, the lender may only offer you a secured line of credit that’s backed by collateral.
#3) Interest Rate
Don’t forget to consider the interest rate when applying for a line of credit. Lenders charge interest on lines of credit. After all, that’s how lenders make money. But interest rates can vary depending on the particular type of line of credit. Some of them may have an interest rate of just 5%. Other lines of credit may have an interest rate of 10% or 15%.
#4) Term
Most lines of credit are only good for a fixed period. When you obtain a line of credit, you won’t be able to draw money from it indefinitely. Rather, the line of credit will have a term that determines the length for which it’s valid. Common terms for lines of credit include two years to five years.
#5) Draw Fee
In addition to charging interest, some lenders charge a fee each time a borrower draws money from a line of credit. Known as a draw fee, it typically consists of a percentage of the draw amount, such as 1%. If you draw $1,000 from the line of credit and the lender charges a 1% draw fee, for instance, you’ll have to pay a fee of $10.
#6) Approval Time
You may want to consider the approval time. Lenders won’t instantly evaluate and approve your application for a line of credit. Even if your business meets all of the necessary requirements, it may take several weeks. But some lenders have a faster approval time than others.
This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.
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