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What is a Business Line of Credit?
A business line of credit is a flexible business loan that allows you to borrow up to a certain amount, or credit limit, to cover short-term working capital requirements. Unlike a term loan, you only pay interest on the amount you actually use. For example, if a business owner has a credit limit of $150,000 but only uses $40,000, they only have to pay interest on the $40,000 draw. Once the amount has been repaid ($40,000), the business owner can draw additional funds up to the amount of their credit limit ($150,000).
There are various types of business lines of credit, each with their own benefit: secured business lines of credit, unsecured business lines of credit, real estate lines of credit, and business credit cards. Credibly provides access to both secured and unsecured business lines of credit with a maximum credit limit of $250,000.
Line of Credit vs. Term Loan
The main difference between a term loan and a line of credit is how you receive the money and the repayment terms. Term loans provide a specific sum of money that is repaid over a fixed period of time, otherwise known as the loan term. Line of credits on the other hand provide a revolving account that allows borrowers to draw up to a certain amount, repay the amount borrowed, and redraw up to the amount of the credit limit to receive additional funds. Unlike keeping up with the fixed payments of a term loan, you will be required to pay interest on borrowed balance while the credit line remains open. In many cases line of credit, borrowers are required to pay a minimum amount each month to avoid additional fees or penalties. Some lines of credit are open-ended meaning that the line does not close after a certain period of time as it does with a term loan, whereas others may close or become inactive after a certain amount of time or period of inactivity.
Is a Line of Credit Right for My Business?
As a business owner, there are often times when working capital is tight. Without ample liquidity to cover expenses like payroll, inventory, rent, and utilities it can be difficult to maintain operations. As one of the most flexible financing options, lines of credit are great for ensuring that you have the necessary working capital to keep your business running and that you have access to emergency funds if needed.
For many businesses, a line of credit is the go-to solution for stabilizing cash flows as borrowers can secure access to funds and then draw at a later time when additional working capital is needed. It’s also a great option for those who need to remain adaptable. After all, business owners often have a limited window of time to seize the opportunity when it arises and a line of credit allows them to quickly access the funding they need to pursue the initiative. And because you only pay for what you use, lines of credit are also great emergency funds. That said, a line of credit would not be the right option in certain scenarios, such as trying to grow a business as the total cost of capital is typically lower with a term loan.
How To Get a Business Line of Credit
Line of Credit: Advantages and Disadvantages
While the flexibility and revolving nature of a line of credit makes it a great fit for certain circumstances, it may not be the perfect financing fit for every need.
FAQs About Business Line of Credit
Is a business line of credit considered income?
The cash received from your line of credit is not income. While it does give you a quick cash infusion, you are borrowing the money and paying interest on the amount borrowed.
Can you use a business line of credit for personal use?
No. Borrowers may not use their business line of credit for personal use. A financial penalty may result in the event that your lender finds you using your business line of credit to cover personal expenses.
Does opening a line of credit hurt your credit score?
Opening a new business line of credit may lower your credit score in the short-term if the lender makes a hard inquiry on your credit. While this may cause your credit score to drop a few points temporarily, repaying your line of credit in a timely manner can actually help you build your credit.
Other Financing Options
Subject to approval.
*The rate is a simple interest rate calculated from total repayments over 26 weeks.