Business Line of Credit: What to know

A business line of credit is a flexible financing option that allows businesses to access a pre-approved amount of funds as needed, up to a set limit to help with the fluctuating costs of operations. Oftentimes, businesses have cashflow cycles that rise and fall over time. A business line of credit is an excellent way to manage the variable costs that sometimes come with running a business.

Business Hand Shake

How Does a Business Line of Credit Work?

A business line of credit functions much like a personal credit card. You're given access to a revolving line of credit that you can tap into whenever you need it. You're only charged interest on the amount of credit you use and repay, not on the entire pre-approved amount. Typically, payments can be made on a monthly basis. This allows businesses to borrow funds on an as-needed basis while only paying interest on the funds they borrow.

What are the Benefits of a Business Line of Credit?

The primary benefit of a business line of credit is that it offers businesses the flexibility to borrow funds when they need to most. A line of credit is especially useful when expenses arise unexpectedly, or when there is a sudden drop in revenue. Unlike traditional loans, or other financing options, businesses only pay interest on the amount they use. This makes it a cost-effective option, as they're not required to pay a fixed interest rate for a set period.

Another benefit of a business line of credit is that it allows businesses to build credit, just like with a personal credit card. If you're able to use your line of credit responsibly and repay it on time, this can help you establish your business's credit profile, which can be important down the line if your company ever needs to borrow funds again.

What Can a Business Line of Credit Be Used for?

A business line of credit can be used for a variety of things from keeping cash flowing during times of low revenue, offsetting seasonal or variable costs such as inventory purchases, paying for repairs, covering payroll or other operating expenses. They allow businesses to access funds quickly so they can stay afloat during tough times. Additionally, some businesses use lines of credit to cover expansion costs, purchase additional equipment for their business or manage their cash flow.

Can I Get a Business Line of Credit with Bad Credit?

This depends on the business and the lender in question. Some lenders are willing to extend lines of credit to businesses with bad credit, while others are not. However, if you have a history of making late payments, have a low credit score, or high debt-to-income ratio, it may be difficult to secure a line of credit. It's best to work on improving your credit score first. You may also want to talk to your lender and discuss your options. They may be able to offer more flexible repayment terms, or work with you to find another financing option that better suits your business's current financial situation.