Should your company take out a small business line of credit?

It’s incontrovertible fact: every small business needs to be able to adapt to change, especially during times of uneven growth or cash flow. That’s where we come in. Utah community banks like ours specialize in helping small businesses access to cash when they need it. And considering how much money small businesses generally need to survive, credit products come in handy. For some companies, an unsecured line of credit can be used as a perfect solution. Let’s look at the specifics regarding a business line of credit in Utah and beyond.

What is a Small Business Line of Credit?

You may wonder whether a small business line of credit acts more like a loan or a credit card? We’re here to tell you it operates more like a credit card. Still, like a small business loan, an unsecured line of credit provides small businesses with a way to address any business expenses that arise. But unlike a small business loan, there is no lump-sum disbursement. And you won’t be required to provide a monthly payment on that disbursement.

It’s still important to note that small business lines of credit are subject to annual review and renewal depending on your loan servicer. They are also revolving, like a credit card. Interest will begin to accrue the moment you draw funds down. And, of course, the more you pay it down the more is available. And like a credit card, there will generally be a set amount you can borrow.

The No. 1 reason to open a business line of credit is to gain access to short-term funding. Otherwise, it may not be the best option for your Utah-based business. Most businesses use these funds to support financing for operational expenses like supplies and payroll or for increasing inventory. Cyclical businesses often rely on an unsecured line of credit as a source of off-season working capital.

Unlike many small business loans, an unsecured line of credit is not designated for a specific purpose or purchase — it’s a good choice for small businesses looking for ways to better manage cash flow. Funds are typically drawn from the line of credit by using a business checking account, a small business credit card, or even a mobile banking app, like the one offered here at First Utah Bank.

Requirements and Advantages of a Small Business Line of Credit

There are two types of debt, secured and unsecured. Unsecured debt means you don’t have to put up collateral to receive access to funds. Generally, unsecured debt comes with a variable interest rate with borrowing amounts ranging anywhere from $10,000 to $100,000. In some cases, if you need to gain access to a line of credit greater than $100,000 you may need to secure your line of credit with a blanket lien on your business assets.

You must pay close attention to the lender’s specific requirements for a business line of credit. One example of this could be ownership time. In some cases, you will need to show ownership over the business. A big benefit of a business line of credit is the interest rate. Whereas credit cards can routinely charge 20% APR or more, for business lines of credit you will generally get a lower APR than you would on a traditional consumer line of credit.

Maintaining a line of credit in good standing may help build your business credit rating and position you for better loan terms if you seek future financing. Many small business experts suggest that first-time applicants should start a modest line of credit and pay off the debt quickly as a way of building a credit profile.

Keeping your small business finances running smoothly can often be a challenge in today’s fast-paced world. Depending on your specific business needs, a small business line of credit could be the simple solution you need to meet your goals for growth — at a pace that’s right for you.

The Pros and Cons of a Business Line of Credit for Utah Small Business

A business can give you access to credit and capital when you need it, but that doesn’t mean this is a financial product for everyone. Small businesses benefit from business lines of credit because they can use it to expand their business. And during a slow period, like those during the COVID-19 pandemic, businesses could draw upon business lines of credit to stay afloat and make it through tough times. A line of credit also allows businesses to receive only the money they need, rather than a giant lump sum that might be needed.

On the cons side, without additional financing, of course, you will have to eventually pay it back. That’s why it’s important to use the money to grow your business. You should be utilizing the money for enough growth to pay back the loan early. If you don’t budget in that monthly payment, you may struggle to pay it, which puts you at risk of defaulting on the loan. If you made a personal guarantee, you’ll also risk your personal assets being seized if you can’t pay the loan. That’s why it’s so important to conduct your due diligence.

Are you a small business in Salt Lake City looking for a business line of credit to finance the growth of your company? Check out First Utah Bank’s commercial lending page and then stop in or give us a call: (801) 308-2265