The Ins and Outs of Having a Business Line of Credit
Business lines of credit are not that different compared to business credit cards. If you have a business loan, you will have an unsecured line of credit that can be accessed when business expenses come up. However, with a business loan there is no lump sum of money that is to be disbursed when opening the account, and it would require a monthly payment.
Lines of credit will still have to pass an annual renewal and a credit check. This line of credit is revolving, much like a credit card. Once you have drawn funds, interest will begin to accumulate and you will start paying monthly payments. As you pay down the balance, the funds become available for borrowing again. As with most credit cards, your lender sets a limit to the amount that you are allowed to borrow.
One of the top reasons many businesses will open lines of credit is so that they can gain access to short-term funds. It is common for these funds to be used for supplies, paying their employees or to purchase more inventory stock.
Small business loans have a specific purpose that the money has to be used for, but an unsecured line of credit does not have those same limitations. An unsecured line of credit is the best way to go when you need cash flow for your purchases. Generally, the money can be drawn out by using a mobile banking app, the checking account or the business credit card.
Lines of credit for your business are usually offered as unsecured debt. This means that you are not required to have collateral (assets that could be sold by the lender if you were to default on the loan). Most of the unsecured lines of credit have a variable interest rate on amounts ranging from $10,000 to $100,000. For lines of credit greater than $100,000, most banks will require that you secure your loan.
It is important that you research your lender’s requirements for a business’s lines of credit. Each bank can vary slightly on their lending requirements. However, rates for having a line of credit versus a business credit card are often lower.
In order to be eligible for lines of credit, you must keep your business credit rating in good standing. It is a good idea to apply for a small line of credit and pay it off as quickly as you can to help build a good credit profile.