What is a Business Line of Credit and how does it work?

Every small business must be able to adapt to change, especially in times of growth or uneven cash flow. When you need easy access to cash and flexible terms to repay borrowed funds, an unsecured line of credit can often be an ideal solution.

What is a small business line of credit?

A small business line of credit has more in common with a small business credit card than it does with a small business loan. layer.

Like a small business loan, an unsecured line of credit gives a business access to money that can be used to meet any business expenses that arise. Unlike a small business loan, however, there is no lump sum outlay at account opening that requires a subsequent monthly payment.

A small business line of credit is subject to annual credit review and renewal and is revolving, like a credit card: Interest begins to accrue once funds are withdrawn, and the amount you pay (excluding interest) it becomes available to borrow again as you pay off the balance. As with a credit card, the lender will set a limit on the amount you can borrow.

Using a business line of credit

The main reason to open a business line of credit is to have access to short-term financing. Most businesses use these funds to support the financing of operational expenses like supplies and payroll or to increase inventory. Businesses with a cyclical model 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 option for small businesses looking for ways to better manage cash flow. Funds are typically drawn from the line of credit using a business checking account layer, a small business credit card layeror even a Mobile Banking application.

Understanding secured and unsecured lines of credit

A small business line of credit is typically offered as unsecured debt, which means you don’t need to put up collateral (assets that the lender can sell if you default on the debt). Many unsecured lines of credit have a variable interest rate and are available for amounts between $10,000 and $100,000.

For amounts greater than $100,000, you may be required to secure your line of credit with a general lien on your assets or a certificate of deposit.

What does it take to get a small business line of credit?

Be sure to research the details of any lender’s business line of credit requirements. For example, many banks will require that a business has been under their current ownership for some fixed amount of time.

Rates on a business line of credit tend to be lower than a business credit card, which can charge upwards of 20% APR for purchases, and even more than that for cash advances.

Other advantages

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

Keeping your small business finances running smoothly can be challenging 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 growth goals, at a rate that’s right for you.

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