Line of CreditAll you need to know about small business funding in Canada.
A line of credit is unlike a merchant advance or term loan in that it revolves as you borrow and repay the funds. Simply put, if you have a $10,000 line of credit, you can borrow as little or as much as you would like from that $10,000 at any time you would like. As you pay off what you borrow, you free up that line of credit for future use.
Three Main Types of Credit Lines
If you are interested in obtaining a line of credit for your business, you can often choose between four main types of credit lines. Each one works a little differently from the next, and your bank likely offers all of them. Unlike merchant advances or private term loans, you may need to prove that you have a credit score of at least 600 in order to qualify.
Cash Flow Credit (Working Capital) – This product works a bit like a merchant advance, but the qualifications are generally a little more difficult for business owners to meet. Because you can replenish the line of credit over and over again, which presents a greater risk to the lender, you may be required to provide collateral. What’s more, your ability to obtain these funds may depend on your credit score.
Business Equity Line of Credit – Just like a home equity line of credit, this product allows you to utilize the equity in your business to make purchases. It often comes with low interest rates, but because you’ll need to put up as much as 75% of your business as collateral, it can be risky. You can often obtain this type of loan with a lower credit score since it is based on the equity in your business.
Standard Business Line of Credit – This is like a business equity line of credit, but you do not put your business on the line. You may be required to provide collateral, but the options are quite flexible in this case. A standard business line of credit usually requires an excellent credit score.
Business Credit Card – A business credit card is the most popular line of credit among Canadian business owners. There are many banks and finance companies out there that provide them, and you can shop around for the best rates.
Line of Credit vs. Merchant Advance vs. Term Loan
The most difficult part of utilizing a line of credit wisely involves determining the situations in which it is best to use it. For the most part, because a line of credit is generally more expensive than a merchant advance or term loan, it is best used for smaller purchases and short-term needs. For example, if you want to buy $7000 worth of equipment, you could use your line of credit. Conversely, if you want to spend $50,000 on renovations, a merchant advance or term loan is the better solution since the repayment schedule is much more flexible and the interest is likely much lower.
Although a line of credit is not always the best way to make large purchases, it can certainly come in handy for smaller purchases, day-to- day transactions, and to make up for temporary shortcomings in revenue. Consider your credit and the risk involved before you settle on a line of credit for your business.