One of the products available on many business accounts is the business line of credit. Surely you have heard about this option, but do you know exactly what it is? Do you know how it works? What is the difference between a traditional loan? We will answer all these questions below.
What is a business line of credit?
A line of credit for companies is an account with a sum of money pre-granted by the bank for use in specific cases. The amount and the repayment terms are based on the particular conditions agreed between the entity and the company.
Each bank offers a different credit policy. Some have a fixed interest rate, whatever the amount of money used. Others, however, have a variable interest. The amount that is allocated will depend on the needs, size, and history of the company.
Not all entities offer the same services. Some charge commissions for having the account open while others do not. There are also some that add some extra advantages, such as free cards or the possibility of withdrawing money abroad.
How does a business line of credit work?
To understand how a business line of credit works, it is necessary to understand, first of all, that the beneficiary has total availability on the extra money accumulated in the account. As it would happen with your own money, it is not necessary to justify it or request any type of permission to use it.
Among the uses that are usually given to this money is to advance payments to suppliers while waiting for the collection of amounts of work or sales made. It is also a guarantee to never delay the payment of employee payroll.
Having a line of credit can entail some expenses. In those cases, the bank makes the money available in exchange for a monthly, quarterly or annual amount. Of course, when the commissions applied in the return fees are used they are usually very low.
What else is the difference between a loan and a line of credit?
There are some differences between a loan and a business line of credit. One of them is that you don’t have to request it every time you need it. Credit is requested when a specific need arises while the line is always available.
Another difference between the line of credit with the loan is that you only pay for what you use. That is, if only a small part of the money of the pre-granted amount is needed, only the interest on the money consumed will be paid.
The fees to pay on a line of credit can seem high. However, if the money used pays off early, it can be more profitable. In cases where repayment is delayed for many months, a personal loan may be more convenient.
If you are not sure what compensates you more, you can do an Internet search to locate the closest entities and ask about their particular conditions. Another option is to enter the website of each bank that offers them and simulate different lines of credit online, so you will see which one is more profitable for you. Another option is to use the new alternative financing formulas.