Owning a small business is challenging. Revenue can be especially difficult to come by, especially in the beginning stages.
82 percent of businesses fail because they don’t have the funds to survive in the beginning stages. As a small business, how do you keep your inventory growing?
The good news is, there is a solution. Opening an inventory line of credit helps small businesses purchase products they otherwise couldn’t afford. But what is the best line of credit to open?
Read on to learn more!
What Is a Line of Credit Loan?
A line of credit loan is different from a term loan. Term loans are lump sum loans that charge interest. A line of credit loan is a loan in which the lender gives you access to a certain amount of money (usually $50,000-$500,000), and you only pay interest for what you take.
Choosing the Best Line of Credit Loan
There are 3 main types of line of credit loans. Short, medium, and long term.
Again, don’t confuse term loans with line of credit loans. The word ‘term’ means something different for line of credit loans than it does term loans.
Choosing the best line of credit loan for your business depends on multiple factors. Your credit score, loan amount, loan period, and what type of business you own are just a few examples of what should influence your decision.
Short-Term Line of Credit Loans
If you urgently need money to replace inventory, chances are, you don’t have 60-90 days to wait. That’s how long it could take to get approved at a bank.
A short term line of credit loan offers you the potential to skip that obstacle. These lines of credit are given by third-party lenders. They aren’t as stringent with requirements and are much easier to get approved for.
Short term line of credit loans often have higher APRs and are usually utilized by business owners with lower credit and revenue. That being said, they’re great if you know that you need a fixed amount of money and have the capital to pay it back promptly.
They can also be great for the novice business owner who’s just starting out.
However, due to the high annual percentage rate, you have to be careful with these loans. They are only ideal if you manage your risk well.
If you’re already in a heap of debt and don’t have a contingency plan, these loans aren’t recommended for you.
Medium-Term Line of Credit Loans
The best line of credit loan depends heavily on where you are in your personal credit journey and where your business is at financially. If you’re expanding fast and have a ton of compiling expenses, but have a weak credit score, a line of credit loan could be tricky.
Medium-term line of credit loans are ideal for financially stable small business owners whose business is expanding sustainably.
Just as short term line of credit loans’ APR and application guidelines match up with short term loans, so do medium-term lines of credit with medium-term loans.
However, There are a few notable perks that medium-term lines of credit loans have when compared to short-term line of credit loans.
Access to More Revenue
Medium-term line of credit loans have higher maximum amounts. How much higher your maximum is will depend on several factors that the lender will determine while you are qualifying.
On average, the difference between a short and medium-term line of credit max is substantial, anywhere from ($50,000-$250,000)
Lower APR
Due to the stricter requirements that medium-term business lines of credit have, they usually have more manageable interest rates. This, again, depends on the lender’s evaluation of your company. For the most part, however, medium-term lines of credit offer you a chance to save long term with lower APRs.
Higher Maximum Means Higher Ceiling
Because you have access to more funds with a medium-term line of credit, you’re able to solve more business needs.
The higher the maximum, the more potential for inventory security
Medium-term line of credit loans are ideal for the small business owner who:
- Has stability in their profit margins
- Has low risk 5 and 10-year growth projections
- Wants to add security and cushion to their future investments in inventory.
If your business is expanding sustainably, your credit score is high, and your personal finances are stable, a medium-term line of credit loan could be the best line of credit for you.
Bank Line of Credit Loans
Banks offer the lowest APR and highest max loans you can find. Because they are so appealing, however, it makes it very hard to qualify for their loans.
Their approval processes can also take up to a month and a half. After you’re approved, they have to underwrite and process the application. After all that hassle, it can take up to a month receive the loan.
If you need a bank-issued line of credit loan, you shouldn’t wait until the moment you need it to apply. Premptively applying for a line of credit loan won’t cost you anything.
Once you are approved, some banks have maintenance fees, but those are easily avoided and worth the risk.
One way to think of a line of credit loan is as an insurance policy. If things go south on a seasonal downturn, or you get a bad batch of inventory, you have your line of credit to fall back on.
Bank-issued line of credit loans are crucial for businesses in times of adversity. Because of their low APR, they allow you flexibility and time to get back on your feet. Even if you’re taking a risk, the potential fallout from that risk is manageable.
Other Types of Line of Credit Loans
A typical line of credit loan requires excellent credit scores. There are other types of line of credit loans that don’t require as high of credit scores and still offer low-interest rates.
The catch: these types of line of credit loans usually require collateral. These types of lendings base their security off of appraising your business to see what sort of assets can be used as reassurance.
There are two main types of collateral that lenders use.
Equipment-Backed Line of Credit Loans
These loans are referred to as asset-based lendings. Instead of attaching high APRS, Lenders will attach the loan to specific business assets.
Lenders focusing on the future of your business rather than your personal past can be a huge upside if you’re looking to start a company.
With equipment backed line of credits, small business owners have the opportunity to take a calculated risk. Remember the word calculated because the lender is depending on your business venture to pay off the loan.
Let’ say you started a brewery and you don’t have enough capital to expand. You decide you want to invest in another brewing vat. An equipment-backed line of credit could be the best line of credit for you.
The lender will place a lien on your new brewing vat, and the increase in profit from the vat will go toward paying the loan off.
If your prediction for increased profits is wrong, however, you could be in a world of hurt. Make sure you’re not betting blindly with equipment backed lines of credit. With asset-backed loans, you want all of the security you can get.
Invoice-Backed Line of Credit loans
Similarly, if your accounts receivable are tied up with a loan, you better be confident it will pay off. Lenders have more control with invoice backed line of credit loans.
Despite the risk involved with invoice backed lines of credit, they are still the most useful in specific situations. Problems with cash flow are best solved with invoice backed line of credit loans.
If you are short on payroll because of late payments, invoice backed line of credit loans allow you to bridge the gap until you catch up. It’s natural; sometimes money takes longer than anticipated to arrive.
You may have a great month and need capital to cover labor costs after you make some investments elsewhere for the company. Invoice-backed line of credit loans allow you the freedom to spend your earnings the second you make them instead of waiting.
Another plus is that your maximum amount increases on a weekly basis depending on your accounts receivable updates. The more cash flow you have coming in, the more you can borrow.
Business Credit Cards as Line of Credit Loans
This is perhaps the most practical type of loan on this list. You may not think of credit card as a loan, but that’s precisely what it is. If you’re thinking about starting a business, one of the best ways to start building credit is with a business credit card.
Here are some advantages:
Immediate Access
With a business credit card, you don’t have to wait for approval every time you want to make a purchase. They are great for unexpected expenses. You need to be careful though.
The power of money at your fingertips is tempting.
No Collateral
Although collateral can help get you higher maximums and lower APRs, there are plenty of instances when you won’t want to put assets on the line.
Rewards
A credit card can be the icing on the cake. Say you have a great year and you’ve built up a ton of points for rewards. Use them for the company party.
Business credit cards are great for extraneous expenses.
0% APR
Having a great first year and then realizing you only have to pay back what you bought is a great feeling. It’s like having a 0% interest line of credit loan for a year.
Great for the first time business owner.
Buy Whatever You Need
Dangerous, we know. Just don’t take that as buy whatever you want and you’ll be safe. No online shopping at 3:00 AM on a Sunday night.
Business cards are perfect for the smaller stuff. But they aren’t the best if you’re looking for a big business venture. You want lenders to put you through a screening process when you’re taking a big risk.
How to Apply for a Line of Credit Loan
There are a few things that you’ll want to prepare for before you go the bank to apply for a loan.
- Start Before You Need the Loan- Don’t wait until the day of the test to study. You’ll fail.
- Decide What You Need- Know exactly what the loan is for, how much you need, and how long you’ll need it for.
- Know the Report on Risk- Understand your industry’s risk and which loans are the best line of credit loans to apply for in that industry.
- Credit Report- 9/10 this will be the first thing that a lender will ask for. Make sure you know your credit score before they do. There are usually a few things affecting your score that you can remedy before applying for a loan.
- Financial Records- Again, be prepared. Applying for a loan can feel fairly intrusive. Review your business’s financial numbers meticulously and study your personal financials. It’s always better to be prepared.
Choose What’s Best for Your Business
Line of credit loans should never be thought of as enemies. They are the catalysts of many business success stories. But it’s important to manage your risk and choose the loan that fits your specific business needs.
Simply put, there’s no one size fits all business line of credit loan. You have to choose the best line of credit loan for you. With so many options, understand that planning for a line of credit loan could take months or years.
There are also solutions in the short term. Evaluate precisely what you need and seek out the right help. There are always innovative ways to get what you want. You’re a business owner, it’s your job to make it work.
What are you waiting for? Apply today to see if you’re eligible for a small business loan. Time’s ticking!