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