Business Lines of Credit Explained
All businesses, be they large or small, need financing at some time or another. Whether it’s to boost inventory, cover payroll, or to fund a growth period in general, there are options available to assist with these financial needs.
One choice that business owners have is to open business lines of credit.
What is a Business Line of Credit?
A business line of credit, simply put, is a business financing option that works similar to a credit card. They are usually offered through banks or business financing companies. This revolving line of credit comes with a maximum, and any amount of cash can be taken up to that maximum, either all at once or as your business requires it. Getting approved for this type of financing can be difficult, so be sure to research any potential lenders and make your you meet the requirements before applying.
How Does a Business Line of Credit Differ from a Business Loan?
Traditional business loans provide one lump sum payment of cash, which is then repaid over a set time period until the balance is paid back. Instead of a lump sum, a business line of credit provides open-ended access to a specific amount of cash which can be used on an as-needed basis
When you take out a business loan, once the principal is paid down on that loan, the money cannot be reused. With business lines of credit, as the balance is repaid, the funds become available for use again. This allows for more flexibility when it comes to increasing needed working capital.
Term loans often times require collateral to back the loan. A business line of credit is usually unsecured, so collateral is generally not necessary. This does usually mean, however, that a business line of credit comes with a much smaller limit than a business loan.
With a term loan, interest is often worked into the repayment structure of the loan and is repaid as a part of fixed monthly payments. When financing with a business line of credit, the borrower may repay only interest, or make larger payments than necessary which reduces the amount of interest paid overall.
Business owners have many options when it comes to their business financing needs. One option to consider is a business line of credit. Business lines of credit, which are different than business loans, offer flexibility and as-needed access to funds to assist with a variety of business expenses.