How Business Lines of Credit Work?

If you are a small business owner, you have probably been thinking quite frequently about procuring a business loan. Much like any other business out there small businesses too go through highs and lows, and when the times are more challenging, a line of credit acts as your safety net or as a source of capital to fund new opportunities.

How does it Differ from other Financial Solutions?

Unlike other business loans, a business line of credit provides you with the flexibility to utilize any portion of the available credit. A credit line provider gives the business access to a specific amount set by a credit limit that one cannot exceed.

When you draw from the credit line, you will pay a draw fee, typically 1%- 3 plus interest on the portion borrowed. This type of financing is a form of a business loan combined with a personal line of credit. You pay a weekly or a monthly payment plus fees until the amount borrowed is paid in full.

The term line of credit sometimes refers to revolving credit. Because after the balance is cleared, you can reuse the credit line amount repeatedly. However, there are a few lenders who will ask you to reapply for renewing your credit line. Renewing your line of credit should not be very challenging as long as you have made your payments on time.


Unsecured VS Secured Line of Credit

Typically, a business line of credit is an unsecured type of debt. This means that most of the time, you will not be required to put up collateral. However, for higher amounts or longer repayment periods, lenders may ask you for a personal guarantee.

If you need funding for any amount exceeding $150,000 and don’t have an asset to use as collateral, you may have to look for other products such as a merchant cash advance or an unsecured term loan.

Example for Line of Credit

If you decided to test a new marketing campaign that added $5000 to your monthly budget for ads and content. You apply and obtain $30,000. This line of credit makes available $30,000 for you to use immediately. You don’t have to use the entire amount; you can take small portions and pay interest plus fees specifically on the amounts borrowed.

What Are the Advantages of a Business Line of Credit?

Making timely payments can help you increase of credit line and get better terms or other business loans in the future. The credit line also provides a safety net in case of unexpected expenses and cash shortages. Usually, you only have to apply and get approved once and then use the available funds repeatedly.

How to Qualify for Business Line of Credit

To be eligible for this type of financing, you must be in business for at least one year and have $100,000 or more in annual revenue. In some cases, for a higher amount and a longer duration, lenders may ask for collateral.


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