What is a Business Line of Credit?
A business line of credit is a type of small business loan that provides businesses with flexibility when accessing capital. Rather than a fixed amount at one time, funds are accessible as needs may arise. The idea is to allow you to be able to scale your business without being hindered by hiccups along the way. Among these scaling activities can be inventory purchases, machine repairs, taking on new opportunities, and bridging the occasional cash-flow gap.
Maintaining a good credit score is important for your small business so you can build its profile and get better loan terms. Making on-time payments and paying down your debt on a regular basis are two ways to maintain your credit score. Business lines of credit may be the most straightforward solution to help you achieve your goals.
Types of Business Line of Credit: Secured and Unsecured
A secured business line of credit:
Typically, secured business lines of credit require your business to use a collateral asset to obtain the line of credit, usually a piece of real estate. Businesses with little business experience and credit issues that would prevent them from receiving an unsecured loan may benefit from this option. The nature of a secured business line of credit is the institution will utilize the collateral for payment if a business defaults on their loan.
The unsecured business line of credit:
An unsecured business line of credit does not require the use of an asset as collateral, similar to a credit card. However, lien and personal guarantee may be necessary. These types of loans are generally more of a risk to the lender. Without the use of collateral, your business must have a strong credit score and a positive business record of accomplishment. An unsecured business line of credit may have higher interest rates than secured due to the risk to the lender.
Why Get a Business Line of Credit?
If your business needs funds at various times or when the demands for working capital increase, you may want to access funds without having to apply for a loan every time.
Small business owners use a business line of credit as a tool to access funds to meet their day-to-day business needs. The line of credit allows the business to access funds as soon as they need it. Whether short-term or long-term, it is one of the ways companies access cash to meet their financial needs as they seek new revenue-generating opportunities.
How Does a Business Line of Credit Work?
A business line of credit works differently than a regular term loan, which provides a one time sum of cash paid over a fixed period of time or set term. A business line of credit allows you to easily access an already established amount of funds to use as the need arises.
During repayment, funds continue to become available so long as you are not over your credit limit. Interest is only charged on funds used at a particular time, and not on the full amount of a line of credit. A credit limit's repayment period varies depending on the lender. Most often, the repayment period is a weekly, monthly, or a periodic schedule that is set prior to receiving the line of credit.
What is the Best Business Line of Credit?
Business lines of credit offered by alternative lenders tend to be the best available on the market. When looking for the best business line of credit, look for options that include:
- Fast process (from application to funding)
- Access to a wide variety of lending options
- A true revolving line - access to additional funds once you begin to pay back the line
- Ongoing access to the line to be used to assist with cash-flow in times of opportunity and emergency
- Better rates and terms that meet your business needs
To learn more about what is considered to be the best business line of credit options available today, complete our simple application to speak with a business financing advisor and weigh your options.
