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Line of Credit: What You NEED to Know Before Applying

An available credit line is excellent insurance against the unexpected expenses every business is likely to encounter from time to time: A pipe bursts in the warehouse. A major client is late with a payment. A computer crashes. Stuff happens. But with an approved line of credit, your business’s response to financial challenges like those can easily be, “We’ve got this.”

A basic definition

A line of credit is a pre-approved amount of cash that’s available if and when you need it. You make payments only on the funds you actually use. And as you pay this loan back, the money becomes available to you again.

How does it compare to other sources of funds? The interest rate on a credit line is typically lower than a credit card’s. And getting a cash advance from a credit card can be pricey. With a traditional lump-sum loan – as opposed to a line of credit — payments are made regularly on the full amount, even if some of it has yet to be spent.

“Should I apply for a line of credit?”

In a word, yes! The best time to apply one is before you need it. And as long as you meet the application requirements, there’s really no reason not to. In setting rates, terms, and loan amounts, lenders take into account:

  • Length of time you’ve been in business
  • Annual revenue
  • Cash flow
  • Credit scores – your business’s or yours, if you’re new in business
  • Ability to provide collateral

Things to consider now

Before you apply, here are three key considerations:

How large a line of credit do you need? Make sure you apply for one that will fit your needs. If you think $30,000 would probably cover your worst-case scenarios, don’t apply for less. On the other hand, applying for more than you think you’ll need brings with it the temptation to use your available funds not as a safety net, but rather as a kind of limitless ATM. And down the road, that can lead to re-payment issues. When requesting an amount, keep in mind your anticipated cash flow, and use your best judgement.

What is the APR? The Annual Percentage Rate refers to all interest charges and fees, including origination fees, annual fees, monthly maintenance fees and transaction fees. Depending on the lender and on the borrower’s qualifications, APR’s can range from 6% to 36% or higher. Be aware of the impact the APR can have on your payments. Look for a rate you can live with.

Can you afford the monthly payment? Borrowing is easy; making payments, not so much – especially if you haven’t made sure ahead of time that the monthly payment will be comfortably within your reach.

Where to look

Banks are one possibility, though their requirements are typically more stringent and their application process more difficult. With online alternative lenders, application is simpler, approval is faster, though the interest rate may be higher.

Think of a line of credit as your “just-in-case” funds. Asking the right questions in advance is the first step to getting a credit line that’ll serve your business well, whatever happens.


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