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 an unforeseen repair the next.
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 also may 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.
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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: the total payback and the ease of repayment.
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 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, 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.
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