GUIDES
Everything You Need to Know About Lines of Credit
As a business owner you may have many questions about lines of credit. We’ll explore the answers to all and help you feel confident.
December 07, 2020
As a business owner in the construction industry, you may have many questions about lines of credit. Are there specific lines of credit for contractors? What is the best construction line of credit? How do you even access a line of credit? Here, we’ll explore the answers to all these questions and help you feel confident with your lending decisions so that you can propel your business with the right capital.
What Are Business Lines of Credit?
A business line of credit is a type of business loan with one main difference. Once you are approved for a line of credit, you will have access to the approved amount of funds. You can take out the amount that you need and only pay interest on the borrowed amount. As you repay, the amount becomes available for you, and you have the flexibility to take advantage of the approved amount of line of credit again. Borrow when you need without any delay.
What Are the Different Types of Lines of Credit?
There are two different kinds of lines of credit for contractors.
A Secured Business Line of Credit requires business collateral to secure the loan. Lines of credit are short-term liabilities, so lenders only ask for short-term assets as collateral, like inventory or accounts receivable, rather than capital assets like equipment or property.
On the contrary, an Unsecured Business Line of Credit does not require collateral assets to obtain the loan. This makes it appealing to business owners in the construction industry, but it has a higher risk to lenders; therefore, they will require a higher credit score and a successful business track record.
Benefits of Lines of Credit in the construction industry
A construction line of credit is a strong option because it offers flexibility to take on more projects without cash flow limitations. This can be taken advantage of to grow your business in a variety of ways. With a line of credit, you don’t have to slow down your work while you’re waiting for payments from other contractors and homeowners.
As long as you make on-time payments, lines of credit can help you build your credit score. An added bonus? There are no prepayment penalties. Lines of credit typically have lower interest rates than typical credit cards, and the collateral needed is minimal or none at all. You can also use a line of credit for big item purchases or equipment rental. There are a variety of benefits to having a line of credit, and once you obtain a revolving line of credit, you will be able to borrow money when needed, rather than waiting for approval.
Tips for using a line of credit
When taking out a line of credit, there are a few things to keep in mind.
Choosing the right lender is critical and requires a bit of research. Big banks, online lenders, and smaller organizations offer this type of lending, and they all have unique fees and APRs (so be sure to ask questions). Small construction businesses tend to remain underserved since big banks typically have more restricted qualifications such as excellent credit scores and years of experience. So, make sure to shop around and explore different lenders.
Get your timing right. Getting approved for a line of credit is easier when you need it least. If you apply when your business is booming, and you have good cash flow, you are more likely to get approved with lower interest and more favorable terms. Then you will have the option to access your line of credit fast when you are in need of working capital.
Focus on growth. Make sure to be smart with how you use this line, too. It’s best to use it for growth capital, business expansion, and short-term cash flow issues rather than to cover losses or save a failing business.
Keep up with your monthly payments. It will help you avoid any late fees, improve your credit score, and the option to take out the line of credit when you need it.
Stay mindful of these tips, and you will find your construction business thriving thanks to lines of credit. Take the first step and join BlueTape today!
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