A business line of credit is a form of small business loan which provides your organization with the sort of flexibility that standard loans simply do not offer. When you have a business line of credit, this allows you to borrow up to a certain amount – for example, $100,000 – and you’ll only pay interest on the portion of money that you have borrowed. You are free to withdraw and repay funds as and when you wish, provided you do not exceed your credit limit. Essentially, a business line of credit works in a similar manner to a credit card – but with some interesting advantages.
Business Line of Credit: How It Works
A business line of credit differs from a standard fixed-term loan. With a standard loan, you receive a one-time sum of cash up-front, which is then repaid over a fixed time period, or term. With a line of credit, you can continue to keep repaying and reusing the level of funds available to you provided you make payments on time. Most lenders allow businesses to repay the balance early on, to help save on interest costs.
Borrowing limits on a line of credit are typically smaller than those you might expect from a fixed-term loan. Lines of credit are usually unsecured, which means that collateral belonging to your organization – such as inventory or real estate – is not required.
How Do I Qualify for a Business Line of Credit?
Traditional lenders, like banks, usually require businesses to provide proof of having strong revenue and a reliable financial history to qualify for a line of credit. While most lines of credit are unsecured, larger lines of credit may sometimes require collateral, which can legally be seized by the lender if you do not make your repayments.
To apply for a business line of credit, most lenders will request some or all of the following documentation: personal tax returns, credit reports, business tax returns, financial statements, profit/loss statements, balance sheets, and bank account information.
Should I Get a Business Credit Card Instead?
Business credit cards are essentially lines of credit, although they differ from a traditional line of credit in many ways. A Business line of credit will typically provide you with a higher credit limit and provides cash directly to your bank account when you withdraw from it. While you can access cash from some credit cards, you will risk being charged fees and a higher interest rate to do so.
While credit cards can be useful, it’s fair to say that a business line of credit offers greater flexibility, affordability, and scalability – whatever your current business needs are.