Line of Credit Rates
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Written By: Adam F.

Cash flow can be one of your most challenging concerns when running a small business. Considering that most small businesses fail in the first five years of operation, according to the Bureau of Labor Statistics, it’s critical to have a plan in place to manage your money correctly.

Some entrepreneurs may think that just increasing revenue is the answer to cash flow issues, but that’s not necessarily always the case. Cash flow is just as important as cash, and understanding when money will come in and go out is crucial to your success. 

That’s where a business line of credit can help.

Business lines of credit can help to alleviate any cash flow issues by offering you a flexible amount of money you can draw from when needed.

But what are the rates for a business line of credit and how much will it cost you? Let’s find out!

Current Business Line of Credit Rates

The current interest rates for a business line of credit will depend on several factors including:

  • Your business credit history
  • The lender you work with
  • Current market conditions
  • And other factors discussed below

With that in mind, it’s hard to give an accurate rate for any one business, but in general you can expect to pay 8% or greater than 24% for a business line of credit according to Bankrate.

What is the Best Way to Address Cash Flow Challenges?

If cash flow is a problem your businesses faces, there are plenty of options worth considering. Sometimes the difficulty is temporary, but in some cases it can be a longer term challenge.

In either case, you should consider a business line of credit. A line of credit is similar to a loan but with some built-in advantages. First, lines of credit are flexible. You may not be sure exactly how much you need, but you don’t want to run short and have to apply again in a hurry. On the other hand, you don’t want to pay interest on a loan of $50,000 if you actually need only $25,000. The National Association of Independent Businesses says that a line of credit is “like an insurance policy that never needs to be paid until you need it.” The security of knowing you have access to cash via a line of credit can allow you to resolve short-term constraints and also take advantage of unexpected opportunities.

How is a Line of Credit Different than a Business Loan? 

Unlike a business loan, a business line of credit allows you to use as much as you need and only make payments on the amount you use.

Because of that, it sometimes makes sense for a business owner to apply for a bit more than they expect to need. There is no disadvantage, and it may come in very handy. In contrast, if you obtain a $100,000 loan, the interest you pay is based on the entire amount. However, if you have a line of credit, you only pay for what you use. The business line of credit rates may be less than those for a flat loan and are almost always lower than those attached to a business credit card. 

How Do I Obtain a Business Line of Credit?

You can apply for a business credit line with the financial institution you use for your checking and other business banking needs. However, keep in mind that you might not get the best line of credit rate from that financial institution. Sometimes, a credit union might feature promotional rates, and you may also want to research the rates available from online banks. 

The business line of credit rate you pay will depend on several factors:

  • Overall interest rates. As the Federal Reserve Bank Board of Governors increases the federal funds rate (which is the rate that banks charge each other for overnight loans), the effect trickles out to other interest rates. Everything from mortgage rates to credit card interest rates follows the federal funds rate to some degree.
  • Your business creditworthiness. A lender will offer you a business line of credit rate that reflects their view of how likely you are to manage your payments effectively. If your business is new, part of the calculation will also include your personal credit history. 
  • Whether your line of credit is secured or unsecured. If you have collateral to offer, you can probably get a lower interest rate. Collateral is something—often property—that the lender can use to recover their money if you don’t pay the loan back as agreed. It’s like mortgaging your house: the bank can sell your home to recoup their loss if you don’t make the payments. 
  • Fixed or adjustable. As with other loan options, taking an adjustable interest rate might allow you to start with a lower rate. In high-interest rate environments, an adjustable rate may offer relief if rates fall. Most business line of credit rates are adjustable. Although you can probably find a fixed rate, it will be higher to reflect the increased risk.

Should I Apply for an SBA-Guaranteed Line of Credit?

One common misconception about SBA loans is that the money comes from the government. In fact, the Small Business Administration (SBA) guarantees loans made to small businesses by participating lenders, including banks and credit unions. These guaranteed loans may make the difference between approval and rejection for some small businesses. However, the downside is that these loans or lines of credit may take longer to approve, and the line of credit rate may not be competitive with a product that doesn’t require the SBA guarantee. Therefore, business owners should research and evaluate their options. 

The Bottom Line

A traditional loan might make sense if you have a specific need for a fixed amount and a fixed rate. However, you may not be able to forecast accurately when and how much cash you will need. In these cases, a business line of credit is often a better choice.

Remember to shop around to find the best rates, or use a broker like Llama Loan to easily get access to the best rates and terms available.

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