There are many ways to get the financing your business requires. Sometimes, a loan is the right fit. Other times, you need something faster and more flexible. In those cases, business lines of credit are an amazing tool. If you’ve never worked with a line of credit before, you probably have questions. Understanding everything you can do with this type of business credit opens up tons of doors for your business.
What Is a Business Line of Credit?
Put simply, a line of credit is permanent financing that you can draw on when needed. It’s revolving, meaning that you can withdraw a certain amount of money, repay the amount, and have access to it again. A business line of credit also has a cap, or total amount, that you can utilize.
Every month, you receive a statement listing the amount of credit you’ve used, the amount remaining and the charges for the money used. You only pay interest for the financing you use. This makes a line of credit very flexible for unexpected needs.
What Is the Difference Between a Line of Credit and a Credit Card?
There are several similarities between a line of credit and a business credit card. Both have specific spending caps and continual access to capital. Getting a credit card has lower requirements, but the interest rates and fees are generally higher. A line of credit usually offers lower rates, better terms and higher spending caps. That’s why business owners often prefer a business line of credit for things such as buying equipment or inventory.
What Are the Benefits of Business Lines of Credit?
One of the main benefits of having a line of credit available is that it helps your company’s cash flow. Having access to money when you need it is a major plus. You can buy inventory on sale, repair your equipment, cover advertising costs, handle payroll and take care of other operating costs, regardless of whether your clients have paid you yet.
Another advantage is that you can improve your credit score by managing a line of credit wisely. This can make it easier to get a small business loan or real estate loan later.
What Do You Need To Qualify?
Generally, a line of credit is based on collateral, a type of business asset, such as inventory, heavy machinery or real estate. There are also unsecured lines of credit. This option requires you to have an excellent personal or business credit score. Many lenders offer both options, so you can choose the best fit for your company.