If you have a business, you know how much a line of credit can help you solve everyday issues, unplanned circumstances or even give you a sense of calm knowing that you can tap into that money when things don’t go as planned. A line of credit is money you can borrow whenever you like for whatever you need to, that is not necessarily a business loan.
What’s the difference? A business loan is an amount of money you need for something specific, when you get approved, the money is wired to your regular cash account and from there you get to use it. On the other hand, a line of credit is money you can access in case you need it but that is not in your account, very much like using a credit card without the card. It’s not your many you are paying with, but is money you know you can borrow.
And the best part is that you can use a business line of credit calculator that uses this equation to plan your payments:
P = r (PV)/1 – (1+r) -n
What’s Good About a Line of Credit?
With the concept of a line of credit clear, you can use it for everything, from a big investment you didn’t plan but is necessary for the business to help you out of a jam if you didn’t reach your accounts receivable goals. It’s, as was said, money in the bank (and of the bank).
Business lines of credit are ideal for variable cash income companies or long-term investments in the company. These are some pros going for the Line of Credits:
- Access to funds whenever you like.
- Interest charged only on the borrowed amount.
- No forceful terms.
- No collateral needed but you can include a collateral to get better conditions.
- You can use the money for whatever you want.
- You can use a business line of credit calculator to figure out how much you’ll pay every month because it can vary depending on the money you owe and for how long you want to pay it back.
Yet, there are cons into using a business line of credit:
- It has a credit limit according to the initial deal you made with your financial institution. You can’t overdraw from it because you can’t access more than what was offered.
- The more you owe, the higher the monthly payment so you’ll need to be careful with borrowing more than you can pay back.
- You’ll be charged with annual or monthly fees even if you don’t use it.
- You’ll need an account in the financial institution to “transfer” the funds you need.
- Interest varies depending on your use of the line of credit so it could be hard to estimate if you are not careful with the withdrawals.
Lines of credit are a healthy and easy way for businesses to fund their immediate needs without having to apply for a business loan the moment they need the cash and it gives the companies room to breathe knowing that they have that cash available at any time.
It is important to be responsible with lines of credit and always pay on time since it’s a direct relationship with the financial institution and a standing commitment with it. If your company’s income is variable, this could be a way to solve your liquidity and investment issues.
Use the formula set before hand or a business line of credit calculator every month so you can keep track of what you owe and how much you need to pay on the due date. Since this type of credit only charges interest on the principal, you can liquidate your debt anytime you want without penalties or complications.
Let us know in the comment section if you’ve ever used a business line of credit calculator and what advantages you found with it.