Many businesses, especially the smallest ones, have been affected by the current global situation, caused by the coronavirus. The number of clients is much smaller than usual, and this definitely threatens the cash flow of the company.
It is then, in this situation, that you might wonder if it would have been good to have a little backup money to fall back on. Well, some entrepreneurs use it, those who already have a business line of credit, while other entrepreneurs do not even have a line of credit in mind, trying to avoid debt at all costs.
However, avoiding debt could affect your business, because when you need a little extra money, it will not be available to you or it will take a long time to obtain it.
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What is a business line of credit?
A commercial line of credit is always issued to a company or business, usually associated with a bank checking account. Just like a credit card, you can get money up to the limit set by the bank that issued it.
When you pay the borrowed amount, it will be available to use again. I'll show you this in a simple example:
Bank of America issues you a credit line for $ 1,000 and you use $ 1,000 of that credit line. You cannot borrow more money, as you covered the maximum amount of your credit line. Now, if you return, pay $ 300, you can use the $ 300 again, and you do not have to submit any type of documentation to your bank again.
If you pay the full amount of the debt, you will be able to resort to it again, when you need it.
If you do not have the need to use your line of credit, most banks allow you to have it without charging you any additional commission for it. Thus, you can have it unused for as long as you consider necessary.
It is important to emphasize that I am not telling you to borrow money that you do not need, but due to the serious consequences caused by the coronavirus, now may be the ideal time to apply for a business line of credit.
You should always consider the points that I will touch on below, before applying for or using the business line of credit.
What are the terms and conditions of a business line of credit?
To apply for a business line of credit, you will need to make sure you understand the bank's terms and conditions.
Some questions that you should answer yourself, would be the following:
- How often are payments made?
- What is the interest rate on the loan?
- What is the duration of the credit line?
- What are the penalties and delays?
- Is it possible to make prepayments or payments in advance?
Unlike a personal line of credit, some banks offer their customers business lines of credit that can make monthly or even weekly payments. Consider this, to decide on the best option from your country, according to your needs.
How much is the total cost of a business line of credit?
You should make sure to add up the interest rates and any other costs associated with the line of credit (some banks may charge additional charges, such as insurance or other operating expenses). You will have to make all the related queries, for example:
- Is the interest rate fixed or variable? If it is variable, you should ask: What possibilities are there to reduce the interest rate, if it rises?
- What happens if I am late in payment? Does the interest rate increase? Is there a delay or fine for it?
- Do you charge a fee or commission only when money is withdrawn or even while the line is not used?
How fast can you access to use the credit?
If you need the money in a hurry, to pay for merchandise or pay the payroll, for example; It is best to check with the bank, as some lines of credit could make you wait longer than usual.
What is the difference between a secured and an unsecured line of credit?
Guaranteed lines of credit are generally offered by banks, who request a guarantee, that is, for example, a property or a machine. Similar to personal mortgage loans, where the home is, which is put as collateral until the term of debt payment.
Unsecured lines of credit are those that do not require any guarantee for their use. They are easier to get and process, however, they are the ones that usually have the highest interest rates.
Should my business apply for a business line of credit during the pandemic?
In this context, it is still uncertain to know the end date of the pandemic, however, in many countries the commercial sectors have already begun to reactivate.
So if you are requesting a line of credit, you must analyze the current situation of your company with a cool head. We know that you have expenses to pay that perhaps cannot wait any longer, so a line of credit can be your salvation, but will you have enough money in the near future to cover the debt?
Well, at present it is the seasonal companies or the companies that commercialized a credit and have accounts receivable, the most indicated in requesting a line.
Seasonal companies have even lower sales than normal, however, due to their seasonality, they will even recover in the future. For example, gift and surprise companies have a clear advantage in February, tripling their sales, which makes them an applicable business in this situation.
In the same way, companies that sell a loan still have receivables that will represent an income and will be able, in this way, to solve the current lack of liquidity.
The sectors that will benefit the most at the end of the pandemic, such as the tourism and entertainment sector, can also be considered here, sectors that will explode when reactivated and will represent millions of income.
For all this, it will always be necessary to analyze the uncertainty of a pandemic that no one knows when the exact day it will end will be.
Finally, a line of credit is easier to approve than a business loan, so you could get it faster, and if you don't want to put anything up as collateral, an unsecured line of credit may be ideal for your business. And it is better to request one, as much as possible, since it is always better to request it with a strong financial position, than in a crisis.
