A business line of credit is an effective financial tool to assist business owners in approach financing thoughtfully and strategically. Having access to a revolving credit line to effectively take advantage of opportunities or fulfill other short-term cash needs can certainly help you build a successful business.
Yet, just like any credit tool, it can also cause you to make several costly mistakes if you are not careful. If you apply some common sense to your business financing decisions, these pitfalls can easily be avoided and minimized.
Don’t take the lender’s word at face value. There are many reputable and reliable lenders available in today’s marketplace, but unfortunately, there are also a substantial number of unscrupulous ones whose primary goal is to get as much money from a business owner as possible.
In an ideal situation, lenders would provide the information within easy-to-understand formats, so the average consumer would understand how a business line of credit works. Unfortunately, most consumers cannot decipher the complex language and terminology used by lenders, so they’re unable to assess the credibility and dependability of the lender’s offers.
Interest rates are often the largest single factor in determining the outcome of a business line of credit. Although the primary function of the credit facility is to provide short-term funding, higher interest rates often translate into higher monthly payments for business owners.
If a business owner wants to maximize the benefits of a business line of credit, he or she must always consider the overall cost of the loan. It’s important to shop around for the best deal and compare a wide range of interest rates offered by various lenders. While it may be tempting to sign on with the lowest interest rate available, this approach could very well lead to future financial problems and financial bankruptcy.
Banks are the obvious choices for business lines of credit. Most banks offer competitive financing rates. However, in most cases, banks require business owners to have collateral (like property) to obtain traditional bank loans. This makes securing a bank loan difficult for most small businesses. Banks also typically charge very high-interest rates.
Small business lines of credit can provide a viable alternative to traditional bank financing needs. Lenders who provide short-term funding options can provide a solution to short-term financing needs. As well, borrowers can access cash from these funds whenever they need it. In some instances, banks may even allow business owners to access their cash via business lines of credit while paying very low fees and interest.
One of the key benefits of a business line of credit is that the funding can usually be accessed quickly and easily. Unlike a traditional small business loan, which can take months to process, a business line of credit is typically due for repayment within just a few weeks.
Plus, borrowers can access the money they need through a simple application process. There’s no paperwork or complex set-ups required. Instead, borrowers simply make one payment each month. And because these funds are paid on a month-to-month basis, most borrowers can budget them well, since they’re available instantly.
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