06 Jun Business Lines of Credit: Flexible Cash
It’s the slow season, and you need capital to order next season’s stock. Where do you turn? Many businesses will opt for short-term business loans or merchant cash advances to take care of their expenses when revenue slows to a trickle. What they don’t know is that business lines of credit are more flexible and reliable. Let’s take a look at the options to understand why.
Short-Term Business Loans
Short-term business loans are easier to come by than their long-term counterparts. They’re quick and come in small amounts, offering a near-immediate infusion into a business’s cash flow. The interest rate is much higher than a 5-10 year term loan, which is only a problem if you don’t pay back what you borrowed ASAP. And because it is an actual loan (as opposed to an advance) it helps build your business credit.
Merchant Cash Advances (MCA)
At first glance, an advance may seem appealing because it’s quicker and more flexible than a traditional loan, but– as with any type of funding– it has its pros and cons. An MCA lender gives the business owner working capital, and in return receives a percentage of the owner’s daily sales until the entire sum (plus interest) is paid. This means two things:
- Business performance is more important than credit history, so MCAs are a viable alternative for companies that do not qualify for a loan.
- Because lenders take a percentage of receivables, repayments are flexible.
It sounds great until you realize that advances are not loans, so they aren’t subject to state laws that regulate interest rates. What you end up owing might be much more than what you expected.
Business Lines of Credit
Lines of credit walk the line between MCAs and short-term business loans. They provide essential short-term capital for small business owners with greater flexibility than traditional loans. Business lines of credit authorize a lump sum without actually giving it to the borrower. They are much like credit cards in that you only have to pay what you use. For example, if a business is approved for $10,000 but only needs $2500 right now, the owner would withdraw the $2500 and pay interest on the amount used. Some start-ups have used lines of credit as insurance; they don’t plan on using the money, but it’s there if they need it.
Lines of credit also have open-ended terms, meaning that as long as you pay the minimum on-time, you determine the overall repayment period. Unlike credit cards, however, they often have a lower (if any) APR and encourage cash advances. Business lines of credit also help improve credit scores as long as the account is active.
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