How does a business line of credit work

by | Jul 13, 2021 | Business Financing, Financial Advice, Insights To Business

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When you have a small business, utilizing a business line of credit can help you make the most out of new opportunities that often arise when you least expect them. Being able to access a line of credit will allow you to purchase additional inventory or just meet your business’ day to day expenses if an emergency occurs. Having a line of credit that you can utilize will also help you gain the credit you will need for larger loans in the future. A short-term loan may be able to kick start a project that is designed to boost your revenue and inspire long-term growth.

What Is a Business Line of Credit?

A business line of credit is a fixed amount of working capital that you have access to through a revolving loan. You can use it whenever you need a small boost financially. Lines of credit can be used for many different purposes. If your business experiences a drop in sales due to it being a slow season, you may need a boost when it comes to buying inventory or making much-needed repairs. Getting through your slow season may mean using a line of credit to pay for the day-to-day expenses that can be overwhelming if your sales drop too low.

Secured or Unsecured

A secured line of credit normally involves using some type of asset as collateral. This secures the loan and guarantees that the lender will get their money if for any reason the business cannot make the payments. Equipment, vehicles, accounts receivable notes, and inventory all hold sufficient value to be used as collateral. If the business defaults on the loan, the lender can seize the proper and sell it to recover any money that they may have lost.

An unsecured line of credit does not require collateral, but it does require a rather strong credit history. A lender will be more likely to offer an unsecured line of credit to a business that has a proven track record of on-time payments and a strong history of growth and increased revenue. The stronger your credit profile, the more likely you will get an unsecured loan.

Term Loans vs Lines of Credit

Term loans and lines of credit are two completely different types of loans. A term loan is normally for immediate use and will give you much longer to pay back. A bank will look closely at the credit profile of your business to determine how much you qualify for. A line of credit, on the other hand, is normally set up for future use. While your company’s credit profile is used to determine the amount, the loan is usually for much less than a term loan and will be paid back much faster.

How Are Lines of Credit Used?

A line of credit is the amount of money your company can access at any given time if you need it to cover expenses or handle an emergency situation. Every month, you will receive a statement that lets you know what has been used and what is still available. Unlike other types of loans, you will only have to pay interest on the money you use each month. Once you have paid the money back, you are free to borrow against it as needed in the future.

Knowing the difference between a term loan and a line of credit will help you figure out what type of loan will best suit your purpose. When you need a loan fast, it’s important to know all of your options so that you can make an informed choice. Call the professionals today so that you can get the working capital you need.