Bunny Lender
Posted 02/02/2022 in Business Loans

What is a Business Line of Credit & How Does it Work?


What is a Business Line of Credit & How Does it Work?

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


What is a business line of credit?

A business line of credit lets a business borrow up to a certain amount of money and will only charge interest on the amount of money borrowed (like how your credit card works). A line of credit is unlike a traditional loan where you’d be given a lump sum of money that you’d pay back with interest in monthly payments.


How does a business line of credit work?

A business line of credit works similarly to a credit card. With a line of credit, you receive access to a set amount of capital — say, $150,000 — and can draw funds as needed. You pay interest on only the funds that you draw.

One of the biggest benefits of having a business line of credit is the fast availability of funds. Once the line is established, you have peace of mind knowing that you have access to the funds right away. You don't have to worry about applying for a loan. Simply transfer funds from the line of credit to your business bank account or write your company a check from the line of credit account.


Pros and Cons of Business Line of Credit

A line of credit can give you access to capital when you need it, but there are drawbacks to consider as well.

Pros

If you have the opportunity to, for example, expand your business, a line of credit affords you the opportunity to take advantage of it. Likewise, you can get the working capital you need to pay the bills during a slow period.

For many businesses, their financing needs aren’t adequately met with a large lump sum. Let’s say you’re renovating your commercial space. You might need $100,000 now, $12,000 in six months, and another $15,000 next year. A line of credit lets you get the cash you need when you need it rather than paying interest on money you won’t need for a while.

Cons

Just like with any financing, you’ll have to pay it back. 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.

Depending on what type of financing you qualify for, you may end up paying higher interest rates. If you run a startup that hasn’t been in business for two years or doesn’t have a strong credit profile, you may not qualify for the best terms.


Should You Get a Business Loan or Line of Credit?

So how does one decide between a business loan or a business line of credit? There are a few factors that come into play when figuring out what will best fit the bill. Some questions you may want to begin asking might be:

  • How large of a loan will you need?
  • How long will you need to repay the borrowed funds?
  • What will you be using the funding for?

A business loan can be a good choice for planned expenses, such as financing equipment.

Business lines of credit are meant for business expenditures that you will repay within months or a few years. A business line of credit is better in uncertain times, such as when you might struggle to predict revenue and expenses.


Using a Business Line of Credit to Grow Your Business

Checking your business credit report and personal credit score before you apply for a business line of credit can help you determine whether you're likely to be approved. The higher your scores, the better your chances of getting a credit line from lenders who have strict criteria, such as banks. If your scores are on the lower end of the scale, you may take some time to improve them, or try your luck with online lenders.

Business Line of Credit can help you with the following:

  1. Boost your online presence.
  2. Amp up your marketing.
  3. Invest in the right technology.



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