Small business loans have higher interest rates and fees than personal loans. Lenders demand a higher interest rate because of the risk, competition, and complexity of business loans.
How does a Business Line of Credit work?
A business line of credit at a bank works differently from a business line of credit at a mortgage company. First, customers apply for the loan (also called a business application) and are scored by an AI system. The ranking of applicants is based on the bank’s understanding of your business and your ability to pay back the loan.
The bank awards a business line of credit to the top-scoring applicant. In addition, the bank requires a down payment before issuing the loan in some cases. The down payment helps the bank score the risk. After making the down payment, you’re ready to receive your loan.
However, there are caveats to this process. For example, applying for a business loan may require a personal guarantee from you. In that case, you’d be personally liable for the debt incurred by the business. That could be uncomfortable.
What are the advantages of a Business Line of Credit?
A business line of credit loan provides various advantages, including:
- It is a short-term loan.
- It is an easy way to raise money.
- It is a means to avoid the cash flow limitations of traditional business loans.
- It offers an alternative to the lender paying your income tax liabilities, as understandably, the lender is often a part of the problem.
What happens when you agree to a business line of credit?
When you agree to a business line of credit, you give the lender permission to pay your business debts. So, when you enter into a contract to buy a business, the lender feels comfortable offering you the loan. However, the process of deciding whether or not to accept a business line of credit can take a long time.
If you are in a situation where you need to raise money quickly, consider one of the following strategies:
- Use a business line of credit to fund the entire purchase.
- Use a business line of credit to secure a short-term loan.
- Use a business line of credit to meet the requirement for a larger loan by presenting the lender with an asset that you secure.
Conclusion
A business line of credit can be a life-saving resource for small business owners going through difficult times. It can provide the short-term cash flow necessary to keep the business afloat, and it can help improve the company’s credit rating. There are some things to keep in mind when applying for a business line of credit, such as the fact that the interest rates are often high, and the approval process can be slow. However, the benefits of having a line of credit can outweigh these drawbacks. Visit us or let us have a call to speak about the Business Line of Credit for your Small Business in Australia.
