When you have a business line of credit, you can borrow a certain amount of capital annually, just as with personal credit. You make payments only on the credit you've actually used. This can help you manage cash flow shortages or cover surprise costs until you have the funds. You won’t have a regular monthly payment schedule as you would with a long term or short term loan but there usually are minimum monthly payments required.
A business credit line can be secured or unsecured and it can be easier to get compared to other types of business loans. It should not, however, be used for long-term investments or major purchases. Businesses should be able to repay promptly as the interest and late fees can compound quickly with a line of credit.
Rates, terms and limits for business credit lines vary. The interest rates on lines of credit are generally lower than those of credit cards, with higher limits. They are based on the bank or financial institution’s prime rate, plus a premium. Interest is charged as soon as money is borrowed, so a business can set up a line of credit as a safeguard, with incurring interest. There may, however, be a setup fee and an annual fee to keep the credit available.
The amount you can borrow is typically based on accounts receivable and current inventory but usually less than $200,000. A secured business line of credit typically comes with a higher credit limit and lower rates.
Apply - You can get a line of credit through your bank and most national and regional banks as well as many larger credit unions offer business credit lines.
Get approved - Getting a credit line depends on your business’ creditworthiness and your personal credit history and score.
Tap into your funds - Draw down or withdraw funds on your line of credit any time to help your business grow.
A business line of credit may sound the same as a business credit card. There are, however, a number of differences between the two:
|Business line of credit||Business credit card|
|Can be secured or unsecured (collateral required for secured line of credit)||An unsecured loan based on your personal credit history|
|Tap into the line of credit by making a direct deposit to your checking account, or by using a debit card linked to the account||As it works almost exactly like a personal credit card does, use the card to pay for business-related purchases|
|Minimum monthly payment (based on interest charged and average daily balance)||Minimum balance to be paid each month and interest charged for late payments|
|No cash advance fees||Expensive cash advances|
|You can pay off your balance and borrow again as often as you’d like||You can avoid interest charges by paying your statement balances in full|
|Helps to build a credit history for your business||Based on your personal credit history|
|Does not include rewards or benefits||You can receive rewards for your business spending such as airline points|
|May have opening, renewal or maintenance fees||There is usually a joining fee or renewal fee|
There are a number of reasons why a business might apply for a line of credit, whether to take advantage of strategic investment opportunities, meet working capital needs or even as a safeguard.
Here are a few common reasons why businesses might need a credit line:
Still not sure if a business line of credit is right for you? Compare other types of financing to learn more.
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