A Beginner’s Guide for Business Lines of Credit
There are a lot of terms flying at you when you go to open a business in areas such as financing, licensing and even real estate. When it comes to financing, however, it is a good idea to understand some basics of lines of credit before you start applying for your various funding options.
How Do They Work?
One of the most familiar types of credit lines is the credit card, but they do not always work the same way. A credit line is a guaranteed amount of money you have access to for supplies or bills which will need to be paid back when used. For instance, if you run a metal fabrication shop and open a credit line with your materials supplier for a thousand dollars, then you can make purchases from that supplier up to a grand and then pay it off once your clients pay you for the finished item.
How Can You Apply for One?
Lines of credit can be obtained from suppliers, banks or other lending institutions, each of which will have their own application processes. It is fairly standard, however, to factor in the creditworthiness of the company as well as the potential for profits during the application process. This does not mean that it is harder to get a line of credit with a poor credit score, just that you will need to look to suppliers or third parties rather than banks if your credit is less than ideal.
How Do They Impact Your Credit?
Since a credit line relies on your credit to secure, keeping it in good standing can help you build your credit history and score up a bit. This shows future lenders that you have put the line to good use without defaulting on the payments. The lower your credit score is when you apply for one of these lines, the higher your interest rate is likely to be. This can impact your credit if you fall behind on interest payments and put you further in dept.
Lines of credit can be a big benefit to businesses, especially those which need to purchase supplies before they can get paid for projects such as manufacturing, auto shops and more. You can get these lines from banks, from suppliers or from third-party lenders to best fit the needs of your company. You can even use a credit line to improve your credit score by making on-time payments and keeping the account in good standing.