Dear M & M: I need a line of credit for my business to draw down on occasion. What can I do? – Joan
Lines of credit are important for any business. Maintaining a relationship with your bank to allow you to draw down on an agreed limit or having access to extra cash when you need it is invaluable. The key is having the ability to pay it back and not turn a short-term credit need into a long-term debt. The SBA warns us while a non-traditional business credit line provides all the convenience and flexibility a business needs, there are some negative aspects to consider. The major drawback is the ability for a business to accumulate debt.
Without a fixed payment schedule, business owners may be tempted to simply pay the minimum monthly payment on its outstanding balances. By carrying debt, compound interest can really add up, especially if a company carries large balances. In a recent survey conducted by the National Small Business Association, “29 percent of small business owners report having their lines of credit reduced in the last four years and nearly 1 in 10 had their line of credit called in early by the bank.”
Lately I have been hearing a lot about Kabbage an online platform that has loaned out over one billion across the US. According to Kabbage, “many business owners want to know the differences between a business line of credit and a traditional business loan. The distinctions are subtle, but each one offers certain advantages, and it’s important to take these into consideration when deciding which financing option is best for your business. One difference is the interest rates you’ll be charged for each.
The rates for a business loan are generally a fixed interest rate, and the interest rate you are assigned for your business loan is dependent on your credit score and risk levels. For a business line of credit, the interest rate is usually tied to the market’s variable rate. Another difference between a business line of credit and a business loan is how your payments are structured. A business loan is very similar to a traditional loan such as an auto loan, where you have a set amount that is due each month until the loan is paid off entirely.
With a business line of credit, the amount you are expected to pay back each month depends on how much of the line of credit was used during the last month. So instead of making a fixed monthly payment like a business loan, with a line of credit, your payment will vary from month to month.” One might want to consider an online platform like Kabbage to receive your line of credit but be cautious and do your due diligence. Links to Kabbage online process to apply https://app.kabbage.com/Account/SignUp .