Line of Credit

When should you start thinking about a line of credit for your new business? About as soon as the idea is born. A couple of the biggest challenges for a new business is finding enough capital, or not having enough capital when you need it. Knowing that you have enough resources to stay afloat as you grow your business is very reassuring to you, and your employees. 

Think of a line of credit as money in storage. The credit line is there for you to use, but there are generally no finance charges incurred until you start to draw some of the money.  Even then, you only pay interest on the money you have borrowed, and the rest of the money waits to be used when you need it.

There are several ways to extend credit to your business. Many new business owners use the credit cards in their pockets as the first line of credit for their new business. This method is the least desirable choice, because credit card interest rates are too high for a business line of credit, and a missed payment usually means painful penalties and fees. Another big watch out is the temptation to use a home equity line. This method is risky, because if your business idea fails, and if it's tied to your house, then you may end up losing your home. 

In the United States, small business startups can apply for a Small Business Administration (SBA) Loan, which is effectively a loan that you apply for through your bank or participating lender, that is backed by the government if you meet the lending criteria.

Most experts encourage new business owners to consider a line of credit; tailored specifically for your business. Lenders will usually offer more favorable interest rates if the line of credit is "guaranteed" using your home or other assets as collateral.  Don't forget that you take on more risk when you use your assets to back up a loan. It may be worth paying a little higher interest for a non-secured loan.

The biggest advantage to a line of credit is that the money is there waiting for you to borrow it when you need it. Another advantage is that the interest rate is usually about as low as you can get for an unsecured loan. These loans are favorable because you can pay them back as often as you can, but the credit is still there when you need it. Eventually, you may not need to use your line of credit, but it's a great resource when you are looking to add capital equipment, or grow your business with an additional location.