Credit lines are a great opportunity for cash flow management when they’re managed correctly. They’re so effective that they are among the few financial products that are offered in almost identical ways to individuals and companies. The biggest difference is magnitude. Lines of credit for businesses are based on the company’s gross income and not profits, and there’s a big difference between gross income for a business and for an individual. Understanding how your business credit line works is the first step to using it effectively.
Secured or Unsecured?
Like personal credit lines, business lines can be secured with an asset or unsecured. Unsecured lines have much higher interest rates and lower limits, but they also have the advantage of being relatively secure from risk, since default does not lead to asset seizure. Secured business lines of credit, on the other hand, often have values that reflect the asset’s worth more than the company’s income. That makes them better for startups that have property but not a lot of cash on hand.
Terms, Benefits, and Grace Periods
Like credit cards, credit lines come with terms for payment and interest that typically include grace periods. Some even offer same as cash periods that are months long for large draws, but that is rare. More often, you have a couple of weeks to a month where you can repay a draw from the line before interest is assessed. Understanding the particulars of those terms is the key to lowering the cost of credit because it helps you decide when to draw and to pay back to minimize interest costs.
For secured lines of credit, interest is often comparable to a term loan against the asset. It is usually slightly higher for credit lines than for term loans because the lines are open and reusable, but the difference is small. In some cases, with the right LTV on the credit line and a large asset, you might even get a lower rate from the credit line than you would a term loan.
Unsecured credit lines have interest rates that are often comparable to but slightly lower than business credit cards. As a result, they can be a buffer between the interest charges on the cards and the cash payment you need to erase the debt. Consolidating your other outgoing cash by paying it with the credit line and then later paying the line down before interest accrues offers you the chance to control those costs by putting them in one place for assessment, too. If you don’t have a business credit line yet, consider what opening one could do for your business management strategy.