A business line of credit offers a convenient form of business financing. If your company has ever been on the hunt for additional working capital, you may inevitably have asked yourself: What is a business line of credit? That’s understandable, as the short answer is that it’s a set amount of funds that you draw on and use those funds toward business expenses as they arise. An important resource for any company to be aware of, simply read on to find out more about how a business line of credit works, and whether it’s right for your organization.
What Is A Business Line Of Credit?
Put simply, a business line of credit provides companies of every size (including small businesses) with added funds that they can draw upon when they need spare capital with which to handle payroll expenses, or to purchase any given product or service. Like a traditional business loan, it offers access to money that can help you offset business expenses as they pop up. However, unlike with a traditional business loan, you’re not automatically paid a lump-sum amount upon opening a line of credit that you’re required to make payments upon. A business line of credit allows you to draw on those funds, up to the maximum amount the business was approved for, as needed. As with a business credit card, you’ll then be required to pay back the principal (along with any other associated fees) that you have drawn.
The most common reason that you might consider opening a business line of credit is to acquire additional short-term funding, e.g. to help meet payroll, lease or equipment expenses. A business line of credit does not have to be used for any given predetermined business purpose either. Providing added sums of working capital, it effectively allows the business to draw on funds as needed to help offset working expenses as they pop up. A business line of credit is a form of revolving credit, as once payments are made on the outstanding balance, you can then later continue to draw upon these monies (up to total your credit limit) contained within the credit line again as needed.
How Does A Business Line Of Credit Work?
Functioning along similar lines as a business credit card, sums drawn on a business line of credit can be tapped to aid you with regular or one-time payments or to help address various business-related financial needs as they arise. Interest or other fees may begin to accrue on monies once the funds are drawn and you can continue to borrow against credit line sums again (up to a maximum total set by your funder) as you repay your outstanding balance. Make a point to regularly pay off your expenses, and not only can a business line of credit serve as a handy source of additional funds that can help you supplement your day-to-day working capital reserves. You can also leverage it to make bigger purchases than you might not otherwise currently have money in the bank to afford.
In effect, funders will approve business financing up to a predetermined credit limit from which you can draw funds as needed. Payments, interest fees or other fees may not begin to accrue until you utilize and draw on the business line of credit. Two forms of business lines of credit are available: Secured (which require the business to back credit lines with collateral such as equipment, inventory, or outstanding monies due) or unsecured (which do not require these guarantees.). If the business wishes to borrow larger sums, it may need to secure a business line of credit, e.g. by allowing financial institutions to put a lien on the business assets. Some funders may also require a personal guaranteed for a business line of credit.
Business Line Of Credit Vs. Traditional Loan Terms
Traditional loan terms often require you to borrow a fixed amount of money at a preset rate for a predetermined length of time and make regular loan payments. A business line of credit, which often comes with lower rates, requires you to instead pay back monies (with interest or other fees) at periodic intervals once they’re drawn.
If you need access to large sums of capital for a large, one-time expense or sizable investment purchase, perhaps a traditional term loan makes more sense. But if you need a pool of funds that you can draw upon repeatedly from time to time as cash flow needs arise, a business line of credit may prove a better choice for you.
Note that a business line of credit is often a great source of business financing as it functions in similar fashion to a credit card for businesses and the business has the funds on at when a business need arises. As an added bonus, you also don’t need to tap into or spend any of the money from your business line of credit if you should find that your company’s business remains steady and profitable. In effect, a business line of credit better allows you to manage your cash flows, and purchase items – e.g. added inventory stocks or equipment – before certain payments have been arrived, or you have cash in hand.
The majority of business lines of credit are secured with business assets (equiptment, receiveables, real property, etc.) that serve as a form of collateral in the event of a default.
Pros And Cons
As with any financial instrument, there are pros and cons associated with choosing to open a business line of credit. Be sure to research funders and terms before applying.
- Regular, revolving access to capital
- Draw funds as needed
- Ability to make larger purchases without cash in hand
- Easy application process
- Lower rates
- Only required to make payments when you draw on the line of credit
- Helps build your credit
- Potentially lower maximum limits
- Fees may be assessed on each draw
- Credit requirements differ by lender
- May need to be secured with business assets
- Late payments may come with rate penalties
- Shorter timeframes and repayment terms
Who Qualifies For A Business Line Of Credit?
Requirements to obtain a business line of credit differ by individual lender. For example, some banks or credit unions may require you to have done business with them, or retained ownership of the business, for a previous period of time. Similarly, while newer, less-established businesses can obtain short-term lines of credit, lenders may require businesses to have a long and well-established credit history before qualifying for longer-term credit lines.
As a general rule, your business’ credit rating, credit history, revenues, timeliness in paying bills and other variables will impact terms here. For example, these factors may influence the amount of funds that you can borrow against, how long the line of credit will be extended for and various repayment terms.
How To Apply For A Business Line Of Credit
If you’re looking to secure a business line of credit, you’ll want to reach out to a bank, credit union, online financial provider, or other trusted lender today. All can help you begin the processing of submitting an application, which requires you to submit documents confirming your identity, monthly business revenue, verifying business ownership, and outlining your credit history and other background information. Business lines of credit, including small business lines of credit, are a common and frequent request with which most lenders should be familiar.
Several documents must be submitted when you’re applying for a business line of credit. These documents commonly include such items as:
- Driver’s license or ID
- Articles of incorporation
- Financial statements
- Tax returns
- Bank statements
- Voided business check
- Credit report
- Proof of collateral
Banks may extend business lines of credit. But many financial providers which may not be a traditional bank also offer business line of credit opportunities as well. Be sure to consult with a number of these institutions, which can also include online fintech funding providers, to compare terms and determine which lender and offer makes the most sense for your business.
A business line of credit offers you access to a revolving pool of funds that you can regularly withdraw sums from to pay periodic business expenses. A popular choice with businesses of all sizes, it’s a common choice of financial instrument for companies looking to expand and grow. Interested in pursuing a business line of credit? Be sure to reach out to find out more today.