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Lines of Credit for Businesses

Business Line of Credit

A business line of credit allows businesses to access a revolving line of funds to help manage cash flow. This access to ongoing funding can be beneficial for covering working capital needs such as inventory and accounts receivable, or covering other short-term or seasonal cash flow needs.

Here’s how it works: instead of paying consistent interest rates on a lump sum loan, you are given a limit on how much money your business can borrow. You can borrow as much as needed up to your limit (just like a credit card). If you borrow less than your limit, you will only be paying interest on the amount borrowed. The unborrowed funds from your credit line will not accrue interest. This reduces interest compared to taking out the full limit as would be the case with a typical loan.

As your organization reduces the balance on your line of credit, your business line of credit allows you to re-borrow up to your limit without applying for new financing.

Business Line of Credit Requirements

How hard is it to get a business loan? There are varied qualifications depending on the lender. As a standard, most lenders will require several years in business under the present ownership.

Oftentimes, the determining factors on how much credit is extended (as well as the associated interest rate) include the 5 C’s of credit:

  • Capacity (ability to repay)
  • Character (credit history)
  • Capital (earnings + savings)
  • Collateral (securing line of credit)
  • Conditions (purpose and economic)

Business Line of Credit vs. Credit Card

Lines of credit for businesses are similar to credit cards in that you’re only paying interest on the amount you spend. The two major differences between these two credit products is that business lines of credit have significantly higher limits, and usually charge lower interest rates. Where credit cards can be helpful in emergencies or other unplanned expenses for an individual, a business line of credit can be used similarly for the greater demands of managing a business. Certain payments will not allow for using a credit card, such as property lease, payroll, or possibly key vendors you rely on – making a business line of credit a powerful tool.

Business Line of Credit vs. Loan

These are the two most common options when a business needs a cash infusion. A business line of credit does not require a disbursement at the time of account opening (which you will need for a loan), and they tend to be more flexible regarding what the funds can cover.

Most business loans have some intended purpose, such as equipment purchases, or other capital expenditures. Typically these cannot be used for business spending beyond their designated purpose. Business lines of credit are more flexible, which can be particularly advantageous for capitalizing on opportunities for business growth.

A business line of credit allows the owner to answer multiple needs of the organization at once – and as the amount is paid back with interest, that amount becomes available to borrow once again.

With a business loan, you’re borrowing the lump sum and must begin paying it back immediately. These payment terms are typically fixed; and it usually does not matter when you start spending the funds or if you do not use the entire amount.

Is a Line of Credit a Good Idea?

Ultimately, the right credit product depends on the individual needs and industry factors of a business. There is no “one size fits all” financial strategy. It’s useful to understand business lines of credit as a viable option.

If you are an established business seeking maximum flexibility, a business line of credits may be your best option. Contact us to speak directly with a member of our lending team who can ensure your organization is receiving the most value possible. We look forward to connecting soon!