When you are a small business entrepreneur, you know that at some time or another, you will need to secure funding for your business endeavors. The amount and reasons for that funding will naturally depend upon the type of business you own and how much growth you are seeing. Nevertheless, when the time does come for you to seek out funding, it is good to be prepared with information about what options will be best for you.
The more common options that are available to small business owners include loans, credit cards, and lines of credit. Although these financing options carry some similarities — primarily the fact that they can impact your credit score for better or for worse depending on your repayment habits — they are distinctly different from one another.
Of the three main options listed above, you might be interested to learn that a small business line of credit could be the right funding option for your situation. Here is some information about lines of credit and how one might be the right fit for your small business’s needs.
Use Only What You Need
One of the primary reasons that someone might take out a line of credit instead of a loan is that you don’t have to feel pressure to spend the total amount. When you apply for a small business line of credit, you will ask for and qualify for a certain amount. So far, this is the same process as a small business loan. However, when you take out a loan, you are given a lump sum that then must be repaid with interest. Lines of credit are different in this regard.
When you receive your line of credit, it will be for a particular amount. This doesn’t mean you need to spend the entire amount or even pay interest on it. Instead, you simply use the funds that are necessary to cover your expenses and then pay interest only on that amount.
Many small business owners choose to go with a line of credit for this very reason. It saves money in the long run as you don’t have to pay interest on the funds that are left untouched. In situations where you know the exact amount that you need to spend, a loan might make sense. If, though, you feel that you can reduce costs and cut back on spending or if you just simply aren’t sure how much you will need to spend to cover your expenses, a line of credit makes more sense.
Another main reason someone might wish to go for a line of credit as opposed to a loan involves the versatility and flexibility that you get with how you use your funds. A loan might have certain parameters and limitations on what it can be used for. A line of credit, though, can be used to cover pretty much any expenditure that you need it to.