As a business owner, choosing the right line of credit is vital to the financial success of your business. Over the long term, this can be one of the biggest financial decisions that any business makes. There are many different things to consider when it comes to choosing the right line of credit. The better the credit score of a business, the more options it will have in choosing a line of credit. Here are several things to remember about choosing the proper line of credit for your business.
Interest Rate
The interest rate on a line of credit is critical. This is essentially the cost to borrow the money over a period of time. The higher the interest rate, the more expensive it will be to borrow the money. Companies that have a higher credit score generally are rewarded with a lower interest rate on their line of credit. There are may be ways to negotiate a way to get a lower interest rate on a line of credit. The better financial position a company is in, the lower the interest rate will be.
Term of the Loan
The term of the loan is also important to consider. This is the amount of time over which the line of credit will be paid back. As a general rule, the larger the purchase the longer the time is to pay back the loan. The longer the term of the loan, the more the total cost will be to borrow money. If a company can pay off its line of credit quickly, the amount of total interest paid will be reduced greatly. As a company, it is important to balance cash flow in the short term with the long term borrowing costs associated with a line of credit. This is one of the most important things to consider when choosing a line of credit.
Capital Requirements
Many banks will have various capital or net worth requirements for a business to borrow money as well. The smaller the business is, the more requirements there will be. A bank must be compensated for the risk that it takes on when loaning out money. Many companies will have to put up some sort of collateral when they decide to borrow money. For example, a company may have to put up some equipment or land on the contract in case they default on their loan. Always keep in mind the capital requirements when getting a line of credit. Over the long term, this can be a major issue with borrowing money.
Transaction Fee
The transaction fee on a line of credit is also important to consider. Many banks will charge a transaction fee as a percentage of the total loan. This means that if a loan is for $100,000 a business may have to pay a couple thousand dollars for the transaction fee. Always shop around for different loan options when deciding which to choose. This can make difference in the amount of money saved on the transaction. Over the long term, this is one of the best ways for a company to reduce its borrowing costs.
Final Thoughts
A line of credit is a great way for a business to get a quick infusion of cash for business purposes. However, it is vital that these funds are used for the good of the business over the long term. Borrowed money should be put to use where the business is better off over the long run because of it. There are many different borrowing options that are available to companies today. Shopping around for the best rate on a line of credit can make a huge difference over the term of the loan. In addition, getting in to a good financial position can mean saving a lot of money in interest when paying back the debt.