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SMEs are often faced with a variety of financial problems where they need additional support to manage their challenges. For instance, if you need to manage your company’s cash flow, increase working capital, or cover an unexpected expense, you can look for flexible short-term financing such as those in smartloan.sg. In this situation, you should consider a simple and efficient business line of credit.
This type of financing comes with a specific borrowing limit, and it enables the borrower to draw funds for a short period. It’s often considered to be a better option than a business term loan because it can save your business interest rate charges. Let’s take a look at whether or not a business line of credit can help your business.
What is a Business Line of Credit?
A business line of credit comes with a specific limit, and it enables the borrower to draw funds as needed up to that limit while only paying the interest only on the amount they draw. A business line of credit is considered to be a better option for short-term financing needs compared to a business term loan because loans charge higher interest rates based on the entire loan principal.
With business term loans, you can only apply for a set loan amount, and the repayment schedule is based on the lender’s terms and conditions. Business lines of credit are similar to credit cards in terms of functionality. However, business credit cards are considered to be useful for smaller transactions as they charge higher interest rates if you fail to repay the amount on time.
Benefits of a Business Line of Credit
With a business line of credit, the borrower will only be responsible for paying interest on the amount they draw while business term loans charge interest rates according to the entire principal loan amount. That means you can save on interest rate payments because you’d only have to pay interest on the amount you use at a given time.
Moreover, the business can repay and redraw frequently if it uses this type of flexible financing, and it won’t have to pay the fees for early full repayment. Another important thing to understand about a line of credit is that you won’t be asked to provide collateral because they’re usually unsecured.
Disadvantages of a Business Line of Credit
A business line of credit offers limited financing amounts compared to business term loans. Moreover, the interest rates for business term loans are lower than the interest rate typically is for a line of credit. Therefore, businesses should only borrow the amount they need at a certain time. Otherwise, they’d have to make higher interest rate payments.
Different companies have a variety of rules and regulations related to business lending. For example, in Singapore, business lines of credit are offered by traditional banks only. Therefore, it will be difficult for SMEs and startups to get business lines of credit if they can’t meet the bank’s eligibility requirements.
Should you Consider a Business Line of Credit?
A business line of credit is recommended for businesses that need flexible financing to increase working capital, manage short-term cash flow pressures, or cover unexpected expenses. You should only apply for a line of credit if your business can easily meet the bank’s eligibility requirements. By choosing a line of credit instead of a term loan, your business may be able to reduce the interest it’s required to pay because you would only have to pay interest on the amount drawn from the credit line rather than the full loan amount.
Furthermore, a business line of credit enables you to save money because it can be easier for you to repay quickly. Therefore, businesses that need short-term financing and can meet the bank’s eligibility requirements should consider applying for a business line of credit instead of a traditional business term loan.
A business line of credit comes with several advantages like making it easier for SMEs and startups to manage their short-term financing needs. The best part is that it provides you with quick access to money while allowing you to save on interest charges.