The Four Lines of Credit Now Available to Small Businesses

Published: Sep 13, 2019

It’s no longer a secret; the flexibility provided by a line of credit has made it the most sought after means of financing small businesses. A line of credits offers available cash to a business, which can be withdrawn for the running of day-to-day activities and/or financing the business from its start, instead of foreclosing it on banks loans.

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Unlike loans that give a lump sum to businesses and prompt them to pay back over a specific period of time, line of credits are like amounts set aside to serve as means of financing business where you pay interest on the amount withdrawn and you can withdraw up to a specified maximum. If a business pays up the amount withdrawn, the availability of more credit is thus granted.

Let’s review the four available lines of credit for small businesses.

Traditional Line of Credit

This line of credit is typically meant for those entrepreneurs who have been running their business for a very long time and are well established. As an entrepreneur taking a line of credit, it can only be allocated to those annual expenses incurred for the running of your business and other unplanned expenses. This flexible cash will be spent on expenses such as administrative expenses, distribution expenses, operational expenses, etc. It is always available for business owners that need it. They can withdraw from it whenever the need arises. This credit line is usually granted by the bank that you have your business account with, and it requires your business to have high credit scores and yearly turnover report. This line of credit attracts a lower interest rate compared to loans obtained from banks. But if you fail to make refunds of the amount withdrawn or overdraw your account, a higher rate of interest will be paid.

Invoice-Baked Line of Credit

This line of credit can also be referred to as account receivables financing. The debtors’ payback period of your business may belong, you must keep the business running. Instead of waiting for your debtors to pay you back, this credit line provides capital up to the amount owed to your business by your customers. This simply implies that the higher the amount owed to your business, the higher the credit made available to your business and vice versa.

Invoice-backed credits are like a backup which you can use to finance your business prior to the time your customers will pay you back. Though you’ll have to bear the burden of the cost attached to the speed and efficiency of the credit. With the availability of this credit line, business owners need not dig into their savings or apply for a loan.

Short-Term Line of Credit

This is a short-term line of credit for business financing available for small businesses. Businesses that go for this type of credit should have it at the back of their mind that they have just a little time to make use of such capital before making refunds of both the capital and interest charged on capital. Small businesses at their infant stage tend to go for this credit line as it gives them the opportunity to cover business expenses for 6 to 18 months before paying back.

Compared to the traditional line, short term credit are like the conventional short-term loans acquired by businesses as opposed to the long-term loans provided by banks and other financial institutions. Since it is short-term, it has a high rate of interest, lower credit drawings, shorter payback period and looser application requirement. This line of credit is usually available for small businesses that want to take advantage of a business opportunity that requires lesser capital.

Equipment-Baked Line of Credit

This credit line is also referred to as an asset-based line of credit. In this type of credit line, the business has to surrender an asset which serves as collateral for the credit. This credit will be secured on a tangible asset that is on the statement of financial position of the business (balance sheet).

The amount borrowed is based on the market value of the asset on which the credit is secured. To feel safe of the loan, lenders depend on the value of your equipment, inventories, and receivables. Lenders usually hold in lieu of assets which are higher in value than the loan they provide for businesses. They claim possession of the assets if the business fails to pay back the loan. In a real sense, this credit line is the same as a mortgage loan.

Final thoughts

Entrepreneurs are expected to have an idea of the amounts required to lift their business off the ground state. Such ideas tend to structure your loan choices as needed. Of course, ‘not having enough’ is the most dreaded situation, but having an excess could equally be as dangerous.

Thanks for reading.

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