Posted by James Financial Services Inc

What Is a Business Line of Credit?

What Is a Business Line of Credit?


A business line of credit gives you access to a range of funds when you need capital. Unlike the traditional business loan, you have the option of borrowing up to a predetermined amount, usually $ 50,000 to $ 500,000, paying only the amount you withdraw. Take advantage of your small business line of credit to manage cash flow gaps, increase working capital, or deal with almost any other emergency or opportunity. 

Pros of a Business Line of Credit

  • A good way to increase your credit score

  • Bad credit is acceptable

  • Capital available when needed

  • Pay interest only for funds withdrawn

  • Suitable for a wide range of business needs.

Cons of a Business Line of Credit

  • Higher rates for lower credit scores

  • May require guarantees

  • Updated documents may be required for each drawing


How Does a Business Line of Credit for Small Businesses Work?

A small business line of credit is similar to a personal line of credit (like your credit card). A bank or lender provides access to a specific loan amount defined by a credit limit that you can use when you want it.

However, do not make any payments or earn any interest until you have used these funds. You pay for what you use, what this means is, there are no commissions to pay upfront.

Business lines of credit can be protected, backed by collateral such as stocks, loans, etc. Or not secure, accepted only by a personal guarantee.

Revolving Credits on Small Business Line of Credit

This type of financing is often referred to as revolving credit because you can take advantage of it multiple times. Once you've paid what you've spent, you can continue to withdraw principal from your line of credit. 

For instance, let's say you have access to a small business line of credit of $ 80,000. You decide to withdraw $ 40,000, keeping the remaining $ 40,000 in funds available.

Once you pay $ 40,000 (plus interest), you'll have $ 80,000 on hand without applying for another loan. Therefore, revolving lines of credit for small businesses do not have term conditions - it is possible to withdraw and pay these funds indefinitely, as long as the creditor believes you are a responsible debtor. 

One of the biggest benefits of a business line of credit is saving time and energy. Although most business lines of credit are customary revolving credit products, some will not be automatically renewed after full payment of what you owe. Some lenders will ask you to renew your line of credit application. Assuming you get along with the lender, reapplying should be an easy process.

Remember that you will sometimes hear different credit lines, such as short-term lines of credit and medium-term lines of credit. The differences mainly concern minimum ratings, maximum fund values , and interest rates.

Long-term credit lines usually come from a traditional bank. Both medium-term lines of credit and short term lines of credit are generally satisfactory to online lenders.

Business Line of Credit lines Vs. Traditional Term Loans

What makes a business line of credit differ from a traditional term loan? For starters, business lines of credit typically have lower interest rates and closing costs than traditional term loans of similar size. On the other hand, if you are late with a payment or go over your credit limit, the interest rate would increase significantly.

Also, traditional term loans have conventional interest rates over the life of the loan, which is a significant difference between term loans and business lines of credit. 

If you compare a small business line of credit with a traditional long-term loan, keep in mind that lines of credit lead to work better with repeated cash flow issues. In contrast, long-term loans typically have more sense when it comes to specific or unique purchases. Business investment, But that doesn't mean that a line of credit can't be used or used for business purchases.

A business line of credit Vs. Credit Card

Although business lines of credit and business cards are `revolving' forms of credit, there are a few important differences to keep in mind:

  • Credit cards charge extra fees for cash advances and balance transfers in general.

  • Credit cards generally have higher interest rates.

  • Credit cards generally require monthly payments, unlike business lines of credit.

  • Lines of credit provide access to cash.

How to use a Business Line Of Credit

One huge advantage of a business line of credit is its revolving nature - you can withdraw funds, return them, and reuse them. You can use a small business line of credit for different types of business purposes, including:

  • Coverage of seasonal sales recessions

  • Fill in the cash flow blanks

  • Make more substantial purchases

  • Ongoing operating expenses 

  • Provide emergency protection. 

  • Take advantage of unexpected opportunities.

  • This flexibility makes a business line of credit such a relevant loan product for small business owners. If something unforeseen happens, you have the money to deal with it.


Who is eligible for small business lines of credit?

Small and less established businesses may benefit from short-term lines of credit. In contrast, medium-term lines of credit are better suited to businesses with good credit and a strong financial position.

The maximum amount of financing available, the length of time to launch the line of credit, and the terms of repayment depend on the company's income, credit rating, history, and other factors.

How do I apply for a business line of credit?

Applying for a business line of credit can be a very simple process, depending on the line of credit you are working with. The line of online credit providers has fast and streamlined applications due to the use of technology in the subscription processes. Traditional banks have more intense applications.

Typically, online credit providers offer smaller, short-term options, which will come with a quick and easy application process. On the other hand, banks will come up with broader, longer-term options that require more documentation and take a little longer to fund.

Required documents:

  • Account statements

  • Credit score

  • Driver's license

  • Voided Business Check

For banks, you may need to provide the following:

  • Balance sheet

  • Income statement

  • Personal income tax returns

  • Tax returns

Bottom Line

A business line of credit is one of the most flexible financing options available on the market. Even if you don't have immediate financial needs, having a line of credit as a rainy day fund can give you rest of mind. If you return what you use quickly, the cost of a line of credit can be relatively inexpensive. For all these reasons, a business line of credit is recommended for any entrepreneur who needs short and medium-term financing.


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