Stephen Sheinbaum is the founder of Bizfi, the premier FinTech company combining aggregation, funding and a participation marketplace on a single platform for small businesses. Bizfi offers many kinds of alternative funding, from short-term finance, to longer term loans, equipment finance and lines of credit. Since 2005, Bizfi has originated more than $1.3 billion in funding to more than 26,000 small businesses.
Every so often, your business winds up with a financial gap at the end of the month. It might be because of slow-paying customers, or higher than expected expenses. It might not be a big gap, only a few thousand dollars. It’s not something you’d need a large loan for, but you also don’t want to incur the fees or high interest rates that you’d face if you funded it through a cash advance on your business credit card.
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A line of credit is just one of many financial tools that you can use to grow your business, and it should never be used in place of strongly managing your cash flow.
That’s where a line of credit comes in. It is a pool of capital you can draw from a little bit at a time and repay just as easily. If you need $1,000 from it one month and $500 from it two months later, that’s all you withdraw, all you repay and all you pay interest on. The rest of your line of credit stays with the financial institution that granted it.
In the past, businesses could only get a line of credit from a traditional bank or credit union. Now, however, there are alternatives to these sources- alternative finance- and many of these companies offer lines of credit as well. Here’s what you need to know if you’re going to seek this kind of funding:
- Fast Turnaround: Alternative finance companies have invested heavily in technology that can quickly evaluate a borrower’s creditworthiness. This means that they can approve an application for a line of credit in far less time than a traditional bank, often in a matter of hours, rather than days or weeks. And because their systems are looking at dozens of points of data on each borrower, alternative finance companies can often extend a line of credit to a business which might not be viewed as creditworthy by a bank.
- Time in Business: While traditional banks often require a small business to be in business for two years before granting a line of credit, alternative financing companies can, by using technology to better measure a business’ creditworthiness, extend lines to younger businesses. That can be a big plus for a small business, because by using and repaying small amounts of credit, you can begin to build a good credit profile for your business, the kind of solid credit profile which can help you qualify for a lower interest rate on a bigger loan in the future.
- Secured vs. Unsecured: Like other forms of short-term funding, lines of credit often don’t require a pledge of collateral. You won’t have to risk losing a key piece of business equipment to get the funds you need to run your business. But, depending on the size of the line requested and the funder, you may need to secure the line. The interest rate on a secured line will generally be less than an unsecured line. But most importantly, remember to look over all the terms thoroughly before you commit.
- How You Repay: This is another area where alternative finance companies can have a distinct advantage over traditional banks. Many alternative finance companies offer account management systems which can help you easily track how much you have drawn down your line, when you have to repay that funding and, by easily calculating the interest, exactly how much you’ll be repaying. Their technology can keep you from missing a payment, which would increase your cost of borrowing.
A line of credit is just one of many financial tools that you can use to grow your business, and it should never be used in place of strongly managing your cash flow. You need to invoice your customers promptly (with new cloud-based programs you can send an invoice the instant your service is rendered) and, if your business is seasonal, stock away a portion of your high season earnings to help you through the low season. But if you need a line of credit and don’t want to take too much time away from your business to apply for one, alternative finance companies may be the resource you need.