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.
Dissimilar to a small business loan, however, 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.
Dissimilar to many small business loans, an unsecured line of credit is not allocated for a particular purpose or purchase, it is 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 –
One of the main benefits of a business line of credit is its flexibility. 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 the part of credit used
An important benefit is that with a business line of credit, interest is not charged on the unused part of the credits, only the part used plus the fess. For example, if having $60,000 and usage is only $20,000, interest will be on the $20,000 used.
This is the difference with a term loan, interest is charged on the full amount. Some lenders will charge fees to keep the account open, charges for “inactivity” and other fees, so it is always advisable to thoroughly understand and inquire about any potential fees before commitment.
Forming a good relationship with a lender can be quite beneficial later on. If having a good relationship with a lender through the responsible use of credit can lead to help from the lender if in need of a credit increase or further finances for projects in the future.
Better business credit rating
If the lender reports back to the credit bureaus, using the line of credit carefully and repaying on time can be a good way to build credit. This can be advantageous by raising the credit rating of the business. This can be helpful in the future if ever in need of more credit or a term loan.
Lower Interest and lower fees
It is 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.
A business line of credit works like a credit card, with a revolving balance, but they offer lower interest rates, and there are no fixed payments.
Though it is important to check the lender’s terms and conditions before applying for a business line of credit, most of them are flexible and allow business owners to pay off the entire balance when it is convenient for them and will not have to lose sleep over a prepayment fee.