When your business needs financing for cash management, it’s worth considering the options beyond standard loans. Not only do regular loans often cost a lot when you’re seeking working capital, they’re also one-time products. That means you have to apply for a new one every time you need cash. By contrast, ongoing invoice financing, lines of credit, and other options provide you with an ongoing cash flow management solution, and that’s just the first way they’re different from loans. As you consider all the options, it’s worth taking a closer look at business credit lines not only because they are reusable, but also because they are often available to companies that have yet to establish a business credit score. That makes them ideal for building credit you’ll need to apply for loans when you want to purchase assets like equipment.
Grace Periods and Minimum Payments
Most credit lines come with a grace period before interest begins to accrue, which allows savvy small business owners to float an expense for a short period, like one or two weeks, without incurring any interest charges at all. That feature alone makes them a great choice when you’re covering cash flow because it means you’ll often be able to handle a short-term demand without being out any capital in the long run. Even when you have an ongoing balance, minimum payments are calculated to say accessible while amortizing over time if you stop drawing on the account. In many cases, the minimum payment is designed to make sure the maximum balance is repaid within three to five years, often at rates that are comparable to working capital loans with the same payment terms or better.
Secured Credit Line Options
One concern about lines of credit is the interest cost. Most small business owners expect a credit line to have interest comparable to a consumer credit card, which is well beyond what is typically charged for loans. Not only does this overlook that personal credit lines are unsecured in many cases and considerably less expensive than credit cards, it also overlooks that those credit cards are unsecured debt, which is always more expensive than collateral-secured debt options. Business credit lines are often secured with a business asset like the equity in real estate, inventory, or invoice values to limit the interest, making them competitive with the cost of loan financing for short-term capital and less expensive than most unsecured loan options.
The biggest difference between loans and lines of credit is the reusability of your credit line, because you can always draw on an available balance if your account is in good standing. You don’t need to pay it down to zero, and you also don’t need to reapply whenever you need a cash advance. It’s simple and easy.