What is a Business Line of Credit?

What is a Business Line of Credit?
Starting and growing a business requires capital. A business line of credit can help. Square explains everything you need to know. Read now!
by Colleen Egan Dec 07, 2023 — 5 min read
What is a Business Line of Credit?

Starting and growing a business requires working capital. There are many ways that you can invest in your business. According to the Federal Reserve, lines of credit are one of the most popular financing options for U.S. businesses. Forty-three percent of all financing applications were for lines of credit, followed by business loans, and SBA loan or lines of credit. Let’s take a look at one of them: a business line of credit.

What is a business line of credit?

A business line of credit is flexible, revolving capital that gives you access to cash. The way it works is that a bank or online lender may approve your established business for a certain dollar amount, or limit. Then, when you withdraw funds, you subtract that number from the total credit limit to determine your remaining available credit. And once you withdraw funds, interest starts to accrue.

For example, if you have $10,000 in credit and spend $2,000, you have $8,000 in available credit. A business line of credit is revolving credit, so when you pay back that $2,000, you once again have access to $10,000.

A business line of credit can be used again and again (as long as you’re within your credit limit and in good standing). And it doesn’t have to be used on just one thing, so you can get it before you actually anticipate needing it. You might use it for inventory at one point and then for an unforeseen repair the next.

How is a line of credit different from a term loan?

A term loan is a type of business loan that is repaid on a regular schedule with a fixed or floating interest rate. A loan gives you all the money at once, in a lump sum. This means that if you need additional capital, you would have to apply for a new loan or refinancing.

Depending on the loan provider, you may need to have a specific purpose, with a stated goal and projected benefits, to apply for a loan (although this isn’t always the case). Term loans are often used for larger investments, like equipment or technology for your company.

If you’re interested in applying for a term loan, you’ll want to do your own research on lending institutions. Among the things you should pay attention to are the total payback and the ease of repayment.

How is a line of credit different from a credit card?

Both a credit card and a line of credit are revolving forms of credit, but there are also a few differences. The money from a line of credit is sent to your bank account, so you can then use it to write checks, pay invoices, or run payroll for your business. Lines of credit are also typically used for larger purchases than you might use for a credit card and come with a maximum credit limit, so you control how much you spend and the cadence with which you spend it. Credit cards typically come with a physical card; you can make purchases up to a credit limit, and you need to make minimum monthly payments.

How can I use a business line of credit?

There are a number of ways you might use a business line of credit. Some of that depends on how large your line is. But you also want to take into consideration how quickly you can pay off your line of credit.

Because business lines of credit can be procured before you know what you might need the funds for, they can come in handy when you have unforeseen expenses or need to manage your cash flow.

For example, if you run a salon and the pipes burst unexpectedly, you could use cash from a line of credit in the short term to get it fixed quickly (so you don’t lose out on too much business).

Or, let’s say, you run a restaurant that also caters to large events. If your invoices aren’t being paid quickly enough, but you need to buy inventory for your next job, a line of credit could fill that gap until invoices are paid.

Whenever you decide to seek funding for your business — whether it’s a business line of credit, a small business loan, a small business line of credit, or another form of financing — be sure to do your research, thoroughly review your books, and consult with your legal or financial advisors.

What types of business lines of credit are there?

If you’re looking into a business line of credit, be aware that there are two kinds: secured and unsecured lines of credit. Secured lines of credit are backed by your assets. These assets (for example, equipment) serve as collateral, and lending institutions may take recourse in case of default. A small business line of credit, specifically, is typically offered as an unsecured debt, which means you do not put up collateral.

How to get a business line of credit

The process to obtain a secured line of credit may take longer than the process for an unsecured line because your assets may need to be verified and appraised as a source of repayment. Whether or not your line of credit is secured or unsecured may also affect the amount of money that you have access to and the interest rate that you are charged.

If you’re interested in how to get a business line of credit, you’ll need to talk to your lending institution to determine what a secured or unsecured line would look like for your business and what materials you will need to provide for the application. The requirements and repayment terms can differ among lending institutions and online lenders.

FAQ

Where to get a business line of credit

There are many options when it comes to acquiring a business line of credit. Here are just a few:

In addition to the options above, there are alternative lenders that can provide business owners with lines of credit, such as fintech companies. 

Is there interest on a business line of credit?

A business line of credit typically comes with interest. However, you will only pay interest if you draw from it. Those ranges can vary depending on the lender. As the borrower, you are responsible for paying interest on the money you borrow. According to a recent Bankrate article, the typical line of credit ranges from 8–60% or higher, depending on your creditworthiness. Factors like the length of time you’ve been in business, your credit scores, and other business-related financials all contribute to your overall creditworthiness. The better your credit, the more likely you are to be offered a favorable interest rate and lower fees.

Square Loans, LLC and Square Financial Services, Inc. are both wholly owned subsidiaries of Square, Inc. Square Loans, LLC d/b/a Square Loans of California, LLC in FL, GA, MT, and NY. All loans are issued by either Celtic Bank or Square Financial Services, Inc. Square Financial Services, Inc. and Celtic Bank are both Utah-Chartered Industrial Banks. Members FDIC, located in Salt Lake City, UT. The bank issuing your loan will be identified in your loan agreement. The individual authorized to act on behalf of the business must be a U.S. citizen or permanent resident and at least 18 years old. Loan eligibility is not guaranteed. All loans are subject to approval.

Colleen Egan
Colleen Egan writes for Square, where she covers everything from how aspiring entrepreneurs can turn their passion into a career to the best marketing strategies for small businesses who are ready to take their enterprise to the next level.

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