If you’ve been watching the news, you’re likely aware that interest rates are stabilizing. While reductions are on the horizon, businesses still require access to capital to meet client demands. Today’s interest rates shouldn’t deter business owners from pursuing financing to propel their ventures forward. The reassuring news is that there is a straightforward solution that provides businesses with the necessary working capital without locking them into high-interest rate loans as rates adjust.
With economists forecasting a potential decrease in rates during the second quarter of this year, it presents an opportune moment to explore variable-rate loan options such as lines of credit. Variable rate loans, tied to the Prime Rate, fluctuate in line with market shifts. Consequently, when the Prime Rate decreases, so does the loan’s interest rate. This means that securing financing now for essential expenses like utilities and payroll doesn’t entail committing to an expensive loan in the long run.
There’s no need for later refinancing to secure a more favorable rate, as rates adjust automatically. Moreover, if the account carries no balance, there are no interest charges, regardless of prevailing rates. This makes lines of credit an ideal choice for accessing working funds to procure supplies and materials or to respond quickly to unforeseen growth opportunities.
Line of Credit Basics
A line of credit stands out as a versatile financing solution, operating as a revolving loan that replenishes with each repayment into the account. Unlike many traditional business loans with spending constraints, lines of credit offer unparalleled flexibility. They can be utilized for a wide range of business expenses, extending beyond just equipment or property investments. While most borrowers leverage lines of credit for managing working capital, there are also specialized options tailored to address specific needs such as real estate management and other business expenditures.
To secure even more favorable interest rates on a line of credit, borrowers have the option to collateralize the line with business assets. When considering lines of credit, businesses typically choose between two main options: secured and unsecured lines. A secured line entails using the business’s assets, such as real estate, equipment, inventory, or shares, as collateral to secure the loan. By mitigating the risk for lenders through collateral, they can offer borrowers reduced interest rates.
On the other hand, an unsecured line relies primarily on the borrower’s credit history to mitigate risk. Consequently, a secured line may prove more accessible for businesses that are new to the market or have faced challenges securing financing in the past. Opting for the secured route and leveraging collateral assets not only reduces risk but also boosts the borrower’s credit limit on the line of credit, empowering them with greater control over their expenses.
Lines of Credit vs. Credit Cards
Both lines of credit and credit cards fall under the category of revolving credit, where payments into the account increase the borrower’s available credit up to the specified limit. This flexibility contrasts with standard term loans, where repayments typically only reduce interest and premiums without restoring borrowing capacity.
One key distinction between lines of credit and credit cards lies in their cost structure. While most credit cards represent unsecured debt, providing limited capital opportunities compared to asset-secured loans, secured lines of credit offer higher borrowing limits and lower interest rates than many business credit cards. Furthermore, credit cards often feature fixed interest rates, meaning associated costs remain unchanged even if the Prime Rate decreases.
Another significant difference pertains to permissible business expenses. Credit cards may impose restrictions on certain categories such as utilities and payroll, with cash withdrawals incurring substantially higher rates compared to standard purchase rates. Conversely, lines of credit facilitate direct draws to the borrower’s bank account, enabling funds to be allocated to any expense as needed.
How to Use a Line of Credit
You’re already familiar with the flexibility that a line of credit offers, but let’s delve into some concrete examples of how it can truly be a game-changer. Here are scenarios where a variable rate line of credit proves invaluable:
ACCEPTING LARGER CONTRACTS: A contractor eyeing the city’s latest construction project, brimming with potential revenue spanning several years. However, before diving into the project, they must bolster their workforce with new hires. With a line of credit, they can swiftly recruit and onboard labor, without waiting for initial project payments. As the project gains momentum, revenues can be channeled back into the credit line, ensuring funds for future bids.
SEASONAL FLUCTUATIONS: A ski resort heavily reliant on regional weather patterns. During off-peak months when skiing isn’t feasible, the resort faces a revenue dip. To cover operational costs, maintenance, and prepare for the upcoming season, they utilize a line of credit. As snow returns and skiers flock in, revenues replenish the credit line, readying it for the next seasonal cycle.
FINANCIAL SAFETY NET: A local mom and pop shop using a line of credit as a cushion against unforeseen challenges. Whether capitalizing on discounted inventory or recovering from theft incidents, they rely on their credit line to navigate through turbulent times. Once stability is restored, they repay the line, keeping it available for future needs.
What could your business achieve with a line of credit? Seize the opportunity of a variable credit line today, ahead of potential interest rate drops and heightened competition. For personalized guidance tailored to your industry, assets, and aspirations, consult with one of our investment associates. We will ensure you access to the most suitable options at the lowest rates, while providing invaluable insights on debt management, credit enhancement, and more.