What Is A Small Business Line Of Credit? Everything You Need To Know (2024)

Owning a business is a major headache. Especially when it comes to finance, you need access to the working capital to grow. The most successful small businesses also go through urgent unplanned expenses, late invoice payments, less cash flow, and many other short-term difficulties.

A one-stop solution to these troubles?

Well, it’s a small business line of credit!!!

What is it? We will be discussing it in the sections below. Keep reading till the end.

What Is A Business Line Of Credit?

According to Bank of America, “A small business line of credit has more in common with a small business credit card than with a small business loan. Like a small business loan, an unsecured line of credit provides a business with access to money that can be used to address any business expense that arises.“

To be very specific, a business line of credit is a flexible loan for businesses working as credit cards. The company draws money from the credit lines as and when needed and pays the interest on the portion of money borrowed. While they repay the borrowed amount, they replenish and refill the funds available.

• Tip: You can access these funds using a credit card, a business checking account, or a mobile application.

However, a small business line of credit also goes through credit reviews. Additionally, you will need to perform an annual renewal. Just like a credit card, the line of credit also revolves. This means that interests start accumulating when you draw funds.

Moreover, the amount you pay (apart from the interest part) is again available for you to borrow after you pay down the balance. Furthermore, just like a credit card, the lender will set a limit on the amount that you borrow.

How Does A Business Line Of Credit Work?

A Business line of credit is very similar to business credit cards since they allow small businesses to access funds when needed. The interest rates on the business line of credit are generally lower than those of business credit cards. Lenders set interest rates and credit limits based on the factors related to annual revenue or the current owner.

A secured line of credit uses collateral you own as an assurance for your loan. If you do not repay the loan, the lender could take the collateral to meet the debt. On the contrary, an unsecured line of credit does not need collateral, which makes the repayment quite expensive.

Generally, with the small business line of credit, you will get smaller loan amounts than traditional business loans. The best part is that the funding is swift. While it might take a few days or even weeks to get funds from a traditional bank, some online lenders provide you access even within a business day.

Moreover, the repayment terms of a small business line of credit vary from lender to lender. For example, in some cases, you can receive the loan even after a few weeks. Furthermore, with some lenders, you will find a higher rate of interest. The rate that you get will depend on a variety of factors, like your credit history, annual revenue, time in business, etc.

In addition to that, there are other common fees that you need to pay for a small business line of credit. These include annual fees, origination fees, and monthly maintenance fees any time you pull from the line of credit.

How Could You Benefit From A Business Line Of Credit?

A line of credit for small businesses is a flexible loan that they can acquire from financial institutions or banks. Small business owners can access funds through this when needed.

This is the first and foremost benefit of the business line of credit.

Apart from this, there are several other advantages a small business owner can enjoy from a business line of credit:

1. Flexibility

One of the most crucial benefits of a business line of credit is its flexibility. This means that it’s possible to access the cash at regular intervals. The line of credit now makes all the funds available, and you can use them as soon as you need them to use.

2. Control

You can use a line of credit whenever, but you see it as fit to cover the gaps needed in the cash flow. The ongoing operational costs or liberal repayment structure are also incorporated.

3. Approval

To avail yourself of the line of credit, you should not always need a high credit score or collateral. This makes the line of credit a major alternative when you do not get any traditional loan.

4. Business Credit

With the help of a line of credit, you can easily maintain a good credit score. Nevertheless, make sure that you are making the payments on time and keeping a very low account balance. You will see how the credit score goes up in this way.

5. Business Growth

In this competitive environment, the business must adapt to many dynamic business needs. In this reward, the line of credit ensures that your business is smooth enough.

6. Cash Outflows

The line of credit for small businesses ensures you have a healthy flow of money. It promotes unforeseen opportunities and changes the market demand as well.

Compare And Contrast Between Secured Vs. Unsecured Credit Lines

If you do not know, a business line of credit is basically of two types – Secured and Unsecured Lines.

Nevertheless, these two are very different from each other. How?

Check out the table below:

Can You Get A Small Business Line of Credit With Bad Credit?

If you have bad credit, it is possible to get a business line of credit. There are some online lenders who will provide you with credit even if your credit is as low as 500. However,  there are certain drawbacks you will face if you choose bad credit financing. This is because it is risky for the lender to lend a line of credit to someone with bad credit.

The following are some of the lower favorable terms that you might face:

• The loan amount might be less since the lender will want to lessen the risk of lending to a high-risk borrower.
• You will need to make frequent repayments weekly or monthly.
• Some lenders might charge you factor rates in addition to interest rates if you borrow a line of credit with a low credit score.
• You will end up with fewer choices if you have bad credit. Hence, you will be in a disadvantageous position.

Frequently Asked Questions (FAQs):

Q1. What Credit Score Do You Need For A Business Line Of Credit?

Your credit score matters a lot when obtaining a business line of credit. It illustrates the chances of defaulting. While lenders need a personal credit score of around 680, some of them even accept lower scores of 580 to 600.

Q2. How Long Does It Take To Get A Business Line Of Credit?

It may take anywhere from a day to several months to get approval for a business line of credit. As a thumb rule, online lenders are faster than banks, while the banks are also speedier than SBA.

Q3. What Is The Difference Between A Line Of Credit And A Business Loan?

While the business line of credit gives you a pool of finances to dip into, the business loan gives you a one-time lump sum. From a business loan, you will owe interest on the full amount of money. With a business line of credit, you will have to pay interest on the usable money.

Q4. What Will Happen If You Do Not Use Your Line Of Credit?

If you do not use the available credit or use a small percentage, the effects can be of two types. Either it will lower your credit utilization rate or improve your credit scores.

The Final Takeaway

A business line of credit might just be the tool to set a stable flow of cash for your company. It is the short-term need when most of the cash deficit can be seen. A line of credit is more flexible than small-business loans, offering higher limits and lower rates.

Therefore, it is better than credit cards.

But before going for a line of credit, make sure it’s right for your business’s needs.

If you have any questions, drop them in the comment section below.

Any opinions? Just leave them below for us to read.

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