A business line of credit is a type of business loan suitable for small businesses. It provides you with a constant supply of cash to fulfill your business expenses and finance for a company’s growth. If your business is suffering from poor cash flow, then a business line of credit can help you with recurring expenses and expansion plans. Even if you have adequate cash flow, you can still get a business line of credit to keep some cash handy for emergency expenses.
A business line of credit is the most flexible type of business loan. In this type of loan, you can borrow an amount up to a specific limit, but you need to pay interest only on the amount you use. For instance, if you borrow $100,000 for your small business and use only $60,000, then you have to pay interest only for 60K dollars. In the business line of credit, you can draw and repay funds as per your requirements. The only rule is you cannot exceed the credit limit.
How does it work?
A business line of credit differs from the term loan. In the term loan, you get the amount you have applied for upfront, and you have to repay it over a fixed term. Whereas, line of credit allows you to withdraw and deposit the amount as you would like unless you don’t exceed the credit limit and make payments on time.
A line of credit works like a credit card for your business. You can draw and use money from the credit as per your needs. Many lenders give you an option to make early repayment and save money on the interest costs.
With a business line of credit, you can get a business loan ranging anywhere between $1000 to $250,000. Line of credit typically lends you a smaller amount than a term loan, that’s why it’s more favorable for small businesses. Some lenders may charge with maintenance fees even when you don’t use the credit. Hence, you should carefully read all terms and conditions before applying for a line of credit.
Difference between a secured and unsecured line of credit
A secured line of credit: In this, you have to put up collateral as a security deposit against a line of credit. It common to put up collateral for a loan, and that could be other items, too, like your business equipment or inventory. The lenders may prefer a secured line of credit because of the security deposit made by the borrower. A lender can provide you with a high credit limit and lower interest rates. Businesses with poor cash flow or new businesses might only qualify for a secured line of credit because of higher risk.
An unsecured line of credit: This line of credit does not require you to put up any collateral. Line of credit with lower limits is often unsecured, and you don’t have to put up collateral like inventory or real estate. Since the lender has a higher risk, unsecured lined can be more expensive. If your business has reliable cash flow and stellar business credit rating, then you can obtain an unsecured line of credit at reasonable rates.
A business line of credit is the most flexible, reliable, and convenient type of business loan. You can benefit your small business by getting a line of credit. Your company may have the inadequate cash flow to keep up with expenses, or you want a robust back-up option; in any case, a line of credit will serve your purpose. It will improve the cash flow of your business; you can invest in the growth of your company, purchase inventory and pay for surprise expenses.