What is a Small Business Line of Credit and How it Works?

If you own a business you probably already know that sometimes you need to access the working capital to help you grow. Even the most successful small business can experience late invoice payments, urgent unplanned expenses and other short term situations where the cash flow is less than certain. In cases like these, access to some extra funds can mean the difference between closing down your dream project or surviving the tough times and coming at the top.

What is a business line of credit?

A business line of credit is a key component of managing small business financing health. Unlike a business loan, a business line of credit acts as a ready cash at times when needed. A business line of credit can be a small businesses lifeline in times of emergency or even seasonal cash flow tightening.

Obtaining a line of credit for your small business can help your entrepreneurial spirit to take the company to the next level. It can be a more affordable option than a business loan because you pay interest only on the money you utilize.

A critical difference between terms of credit and term loan is that lines of credit are revolving. That means you can use the funds upto your approved amount, then repay what you have used to make the funds available again.

How could a small business benefit from a business line of credit?

A business line of credit is very flexible in comparison to other types of loans. In most cases, you won’t have to specify the particular use for your loan. This flexibility allows small businesses to use a business line of credit as a safety net or insurance policy against the gaps in cash-flow or seasonal lulls in business. And when it comes to running a business, having ample cash flow is imperative. Due to this reason, many business owners apply for a business line of credit.

These credit lines are similar to a credit card where the line is open and available for you to use and you only pay interest on the line you draw.

Since a small business line of credit can be such an affordable and convenient source of capital, it has become a common tool for small business owners.

How does a business line of credit work?

Business lines of credit work in a distinct way. First, unlike a business term loan, you don’t need a lump sum of cash deposited in your business bank account and pay it back incrementally. Instead, you get a credit line that you borrow against and pay back your money through weekly or monthly payments, as you use it. The credit line is revolving or replenishes when you repay the full amount.

You work with a lender to gain approval for a certain amount of money- the top of your credit line- and then you can draw against the business line of credit as you need it.

The pros of a business line of credit:

As a business owner, you are going to have times when working capital is tight, which can be a real issue. Working capital allows you to operate your business, allowing you to afford payroll, maintain inventory and pay for other consistent costs like rent and utility bills. Mentioned below are some of the benefits a business line of credit can provide to your small business:

●      Evens out cash flow during slow seasons

●      Allows you to pay for what you use

●      Improves business adaptability

●      Builds business credit

When could applying for a business line of credit be a better option rather than traditional loan?

●      Does your business regularly need access to short term capital to meet day-to-day business expenses?

●      Is your business a seasonal business where a credit line can help you bridge your busy seasons?

●      Do you usually need extra capital to ramp up your business?