How to know if a short term line of credit or small business loans are right for your business?

As a business owner, additional financing is a must and the most necessary element for any business to run is money. There are small business loans and short-term credit lines offered by the lenders for the purpose of making it convenient for the individuals to avail of the loan. If your business regularly experiences fluctuations in the cash flow and will require additional funds to cover up the expenses, then a line of credit will be a great option to choose from. A small business loan can be used for many purposes like, for purchasing inventory, hiring and training employees, paying salaries, investing in expansion, etc.

A short- term line of credit will give access to the funds that can be used for business expenditures, where a fixed amount of credit will be credited when you need the amount, then that has to be repaid all at once or in periodic installments. This credit line is not a better option for business expansion or to make large purchases for the business like purchasing of equipment. It is very difficult to pay back the borrowed loan amount when you make large purchases.

Although short-term credit lines have advantages, they are not right for each one. So, before taking on one, answer the questions and then choose.

1. How much do you really need?

It is very important to know how much amount is needed to get the need fulfilled. If you take the loan amount more than needed, then it will be a burden to pay the interest rate every month to the lender. So, the amount that you plan on taking should be carefully analysed and then use the amount wisely on the needful requirements.

1. How quickly can the borrowed amount be paid?

If you are planning on to apply for a revolving line of credit, repayment terms will be flexible when compared to other traditional loans. The monthly payments should be made on time and upon default, then there will be a legal action taken by the lender against you.

The interest rate charged on business line of credit typically follows the prime lending rate which means the rate might fluctuate over time. Once you start using your line of credit, the interest rate will be charged automatically.

1. How strong is the credit score?

The credit score has a major role playing in giving the loan to the borrower. Many lenders do not wish to take a risk or burden when the borrower does not make the payment on time. Line of credit or business loans are given to the businesses who are established in the market for a minimum of two years and should have good credit score, even if the business does not have a great credit score, they should have a proven track record of revenues and profits and a week credit rating can also be improved by making timely payments and keeping a low balance. This good credit score will make it easier to secure future funding from the lenders.

Like every business needs financing for their business, both short-term line of credit and business loans have their own advantages and disadvantages, and only you know which one will suit them best. In case you are unable to choose, then the lenders will help you out with it.