What are Business Lines of Credit?

by | Nov 21, 2022 | Financial Advice, Insights To Business

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Every business has times when money is tight. One resource they may be able to draw on a business line of credit. The money you receive from a business line of credit can be used for many different purposes. Most small business owners apply for a business line of credit when they have an immediate need. They can use it to cover payroll, inventory, emergency repairs for equipment or any other needs they may have at any given time.

Business Lines of Credit

A business line of credit works in much the same way as a credit card. This is a “revolving” line of credit that allows the business owner to continue to borrow from the loan as needed. Once payments have been made, the money can be borrowed again and again. As long as the payments are made on time, the money can continually be used.

How Do Business Lines of Credit Work?

Business lines of credit are incredibly flexible in terms of repayment and the ability to continue to borrow against the equity of the loan. The more you can pay back, the more you can continue to borrow. Most business owners will establish a business line of credit and then borrow against it, only taking the amount they need. As they pay off the loan, more money becomes available to them to borrow in the future. The line of credit remains in good standing as long as the payments are made on time.

Requirements for Getting a Business Line of Credit

The majority of lenders require that a business be open for at least six months before they apply for a line of credit. Credit score requirements may vary depending on the lender and how much credit is requested. A business’s ability to repay the loan will also be questioned. In some cases, $25,000 (minimum) may be required annually to prove you can cover the monthly payment for the line of credit. Take a close look at the credit history of your business. You want to make sure your credit is good before approaching your bank for a business line of credit.

Business Line of Credit vs a Business Loan

The primary difference between a business line of credit and a business loan is that a business loan provides one lump sum of money that is borrowed and paid back in full. With a business line of credit, a specific amount of money is set aside and the business owner is allowed to borrow against it as needed. They can continue to borrow from the money as long as the business owner has built the principal amount up enough to cover the funds being borrowed. As long as payments are made, the line of credit remains open. A business line of credit offers benefits over and above that of a traditional business loan. Having an established line of business credit in place can be a lifesaver for a small business as it continues to grow. A solid business line of credit allows the flexibility that is needed to keep moving forward if a business hits a slow period.