Finance Options: Line of Credit
How to Get a Line of Credit for Your Small Business
You are a small business, looking to strike out and grow your services, increase your profits, give your customers a better experience – maybe all three and more besides! But as a small business, a traditional loan arrangement can come with bad connotations. The repayment terms can be structured in a way that does not take into account changes in circumstances, and you could be hit hard by rates. This is where a line of credit can be the best tool for the job. But how do you tap into this method of funding, and what makes it so sought after in the business world? Here are some frequently asked questions about how to get a line of credit for your small business in Canada or you can apply here.
What is a line of credit for business?
A line of credit is a flexible reserve of cash that offers more options than a traditional loan. Capital can be drawn up to the maximum amount, or in small loans, when needed, and interest is only paid on the amount withdrawn. Think of it as the ultimate rainy day fund, a cash reserve that you can call on in times of crisis, or as a way of growing your business steadily when you see potential and opportunity to do so. A business line of credit also tends to offer attractive rates when compared with unsecured loans and business credit cards, giving you the best available repayment options to meet your own needs. It’s also possible to get bad credit business loans.
What makes it an attractive prospect compared to a small business loan?
Because a line of credit is typically held in reserve, it allows your small business to raise your own credit over time. This is particularly useful if your current credit rating is poor, or if your business is new. It also negates the needs for applying for multiple small business loans. Because you only withdraw money when you need it, you can take out small amounts as and when you see fit and know that you still have cash available should you need it. It’s a good alternative for those who aren’t eligible for a conventional loan or one of the government’s financing programmes.
What is the typical loan available to me?
The traditional line of credit is the safety net model mentioned above. It will be a tool designed to cushion the blows of being a small business owner, and will be backed by your own steady business plan. It allows you the chance to concentrate on running your business, safe in the knowledge that any troubles that may arise are easy to deal with. For example, a sudden change in the financial climate, environmental damage, repairs needed for equipment – all of the problems that could seriously harm a small business are covered. Because this money is held in reserve and comes in conjunction with a solid and reliable business plan, the interest rates offered by lenders will be lower than other funding options.
Are there more specific line of credit options that are tailored to my needs?
If your business is equipment based then you could secure a line of credit by using this specialist equipment as collateral. The lender will grant credit based on the value of the equipment that is crucial to your business operations, with the loan backed up by the equipment. This type of arrangement suits merchants who rely on investing in inventory and industrial machinery or specialist tools. Lenders will claim ownership of this equipment in case of a default, but the security offered often means that interest rates are attractive.
What about invoice-backed line of credit?
This is another option for you to consider. Your credit is determined by the value of invoices you are owed, meaning that you draw on this capital when you are waiting for payments as and when you need. This can be a great tool for small businesses who suffer cashflow crises, or in an emergency when funds have been overdue for sometime.
Where can I apply for a business line of credit?
Major banks in Canada offer business lines of credit, but, increasingly, independent providers are offering the same services. Depending on your individual needs and circumstances, going independent could provide you with more flexibility and options compared to a typical bank loan. New businesses often require the merchant to have good personal credit to grant the unsecured funding for their business. Small loans taken out as a line of credit will be easy to process via a bank or independent lender, especially if you already have a working relationship with the lender in question.
How easy is it to access my funds?
One of the huge bonuses of a line of credit for a small business is that your cash can be accessed at any time once the loan is completed. So if you suddenly need access to your reserves for an emergency, you can withdraw the money straight away and solve your problems immediately.
What are the typical rates for a line of credit in Canada?
Again your interest rate will be dependent on your own credit history, your business performance and the bank or lender you deal with. Typically, you will require a good credit score to begin with, so unlike a traditional small business loan the rates will usually be lower and you won’t have to follow the usual steps to get one. Rates as low as 6% can be found, and as these are only paid when you withdraw cash, it shows why a line of credit is so popular with small business owners. In some cases this can creep up to around 15% on an unsecured business line. By speaking to a whole host of providers about why you are looking for a line of credit and by building up your own credit history, you should get a deal that is right for you.