How to Choose the Right Business Line of Credit
The most important aspect when weighing loan offers is cost. Interest typically starts to accrue as soon as you borrow against the line of credit. That means you should pay extra attention to the APR that the lender is offering.
Some small business owners may be eligible for a line of credit backed by the U.S. Small Business Association through its CAPLine lending program. As with all SBA lending programs, interest rates on CAPLines are capped at a set percentage above the prime rate. Note that SBA loans are typically available only to moderately established small businesses that have exhausted all other financing options.
How much you intend to borrow against the line of credit should also be a factor in whether to accept an offer. In fact, your business may need a different loan product entirely. For example, if you intend to borrow a large sum that you do not expect to pay back quickly, a term loan will likely be a cheaper option.
Before accepting an offer, you should find out how often the lender requires payment. Often called a clean-up requirement or pay-down provision, the lender may have a policy that requires you pay your balance down to zero for a short period of time (typically 30 days) at least once a year. Not all banks have this condition, however. If this feature is important to you, it may be worth shopping around to find a lender who waives this constraint.
Be sure to read the fine print on fees when choosing a business line of credit. Lenders may charge a maintenance fee to keep the account open even if the line is not being used. You may also be subject to a transaction fee for using the line, which can include borrowing from or repayment. Owners should also be aware of any opening fees to set up your account, or closing fees if you ever decide to forfeit the line.
There are many benefits to business lines of credit including flexible payment terms and immediate access to cash. It is also far less expensive than credit cards, which operate like revolving credit but typically have higher APRs. However, choosing the right offer could mean material savings to your business down the line. Besides weighing the attractiveness of the terms, it’s also important to consider what you need the line of credit for and how you plan to use it. Carefully consider your business’s financial needs, and choose the offer that will cost your business as little as possible in the long run.
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