What is a small business line of credit?
A small business line of credit is more in line with a small business credit card rather than with a small business loan. Like a small business loan, an unsecured line of credit advances a business with access to money that can be used to resolve any business expense that emerges. However, unlike a small business loan, there is no collective disbursement made at account opening that requires a following monthly payment. A small business line of credit is subject to credit review and annual renewal, and revolves—like a credit card. Interest begins to accumulate once funds are drawn, and the amount paid is again available to be borrowed as down payment the balance. As with a credit card, the lender will set a limit on the amount that can be borrowed.
Using a small business line of credit
The initial reason to get a business line of credit is to have access to short-term funding. Most businesses use the funds to support financing for operational expenses like supplies and payroll or increasing inventory. Seasonal businesses mostly depend on an unsecured line of credit as a source of off-season working capital. Unlike many small business loans, an unsecured line of credit is not allocated for a particular purpose or purchase, making it a good choice for small businesses looking for methods to manage cash flow better. Funds are generally drawn from the line of credit by using a business checking account, a small business credit card, or sometimes, a mobile banking app.
Benefits of getting a business line of credit
Flexible access
Once authorized for a business line of credit, the fund can be drawn when needed, and used for a legitimate business purpose required. Unlike a term loan, funds from a line of credit are revolving, meaning that when paid back, the funds can be used again.
Interest—only on what’s used
Interest is not charged on the unused part of the credits—only the part used, plus some fees. For example, if you have $60,000 , but the usage is on $20,000, then the interest is based only on $20,000. This is the difference with a term loan—interest is charged on the full amount.
Better business credit rating
It can be easier to form a good relationship (leading to credit increases in the future) with your lender, especially if you are responsible with your credit. Plus, if your lender reports back to the credit bureaus, you can raise your business’ rating.
Lower Interest and lower fees
It’s generally better to use a business line of credit from a big bank rather than a business credit card because a business line of credit usually does not have as high rate of interest rate as a credit card. Though it is important to check the lender’s terms and conditions before applying, most are flexible and allow business owners to pay off the entire balance when it is convenient. Big banks can tend to charge fees for inactivity or keeping the account open, just as examples.
