What Is a Business Line of Credit?
A business line of credit gives access to a pool of funds to draw from when you need capital. Unlike a traditional business loan, you have the flexibility to borrow up to a set amount (typically anywhere from $50,000 to $500,000), repaying only the amount you withdraw, with interest. Draw on your small business line of credit to handle cash flow gaps, get more working capital, or address almost any other emergency or opportunity.
Business Line of Credit, Key benefits
- Loan amounts start from $10k to $1M or more
- Terms range from 3 months to 18 months
- Only pay interest on funds drawn
- Capital available faster than traditional lending (under 24 hours in some cases)
Business Line of Credit, Cons
- Lenders may place a UCC-lien
- Harder to qualify for
- Rates typically range between 7%-25%
How Does a Small Business Line of Credit Work?
A small business line of credit is similar to a line of credit (credit card) but for businesses.
A bank/lender gives you access to an amount of financing set by a credit limit, which you can pull from whenever you need it.
When using a Business Line of Credit you don’t make payments or incur interest until you actually use those funds. You pay only for what you use!
A Business line of credit can come as Secured (backed by collateral, assets, accounts receivable, inventory, and so on) or as unsecured (no collateral).
This sort of financing allows you to tap into it again and again. Once you repay what you’ve spent, you can continue to draw capital from that line of credit.
For instance, say you’re given access to a $100,000 small business line of credit. You decide to take out $80,000, keeping the other $20,000 in the pool of available funds.
Once you pay that $80,000 back (plus interest), you’ll have access to that whole $100,000 again—without the need to apply for another loan. Small business lines of credit don’t really have term lengths, you can withdraw and pay back those funds indefinitely (so long as your lender sees you as a responsible borrower).
How to Use a Business Line of Credit
The biggest advantage of a business line of credit is the ability to draw out funds, pay them back, and draw again.
You can use a small business line of credit for a variety of business purposes, including the following:
- Covering Operational expenses
- Cushion to protect incase of emergencies
- Cover downturns in sales
- Make larger purchases
This flexibility makes a business line of credit such a valuable loan product for small business owners—funding ready for any unexpected problem.
Qualifications for a Business Line of Credit
*Based on past Customers
Documents You’ll Need to Apply
- Driver’s license
- Voided business check
- Bank statements
- Credit score
With banks, you may also need to provide the following:
- Balance sheet
- Profit & loss statements
- Business tax returns
- Personal tax returns
Cost of a Business Line of Credit
The basic cost is pretty straightforward, you only pay interest on the cash you draw.
For example, Let’s say you’re waiting on a payment from a client, and you need to pay the bills, so you take out a $30,000 line of credit. You then use $10,000 from that line of credit to cover your bills while you wait for payment.
In this scenario, you’ll only need to pay back $10,000, plus interest accrued on that $10,000 (not the full $30,000).
If your interest rate is 11%, you’ll have to pay back $11,000 (or $10,000 plus $1000 in interest).
Once that’s paid off, you can continue making additional draws up to $30,000 maximum, only paying interest on what you’re borrowing at any given time.