What is a Business Line of Credit?
Every small business must be adaptable, particularly during periods of growth or fluctuating cash flow. When quick access to cash and flexible repayment options are essential, an unsecured line of credit can be an excellent solution.
Understanding a Business Line of Credit
A small business line of credit is more similar to a small business credit card than to a small business loan.
Like a loan, an unsecured line of credit provides funds that can be used for any business-related expenses. However, unlike a loan, it does not involve receiving a lump sum upfront that requires fixed monthly payments.
A small business line of credit is revolving, similar to a credit card, and is subject to a credit review and annual renewal. Interest starts accruing only when funds are drawn, and as you repay the balance, the available credit is replenished, allowing you to borrow again. Just like with a credit card, the lender sets a borrowing limit.
Using a Business Line of Credit
The primary reason to open a business line of credit is to access short-term funding. Businesses often use these funds to cover operational costs like supplies, payroll, or to increase inventory. Additionally, a line of credit can be used to kickstart growth initiatives that need extra capital. Seasonal businesses frequently depend on an unsecured line of credit to provide working capital during off-peak times.
Unlike many small business loans, an unsecured line of credit isn’t tied to a specific purpose or purchase, making it an excellent option for small businesses seeking ways to improve cash flow management. Funds from the line of credit can typically be accessed through a business checking account, a small business credit card, or even a mobile banking app.
Secured vs. Unsecured Lines of Credit
A small business line of credit is usually offered as unsecured debt, meaning you don’t have to provide collateral (assets the lender can seize if you default). Many unsecured lines of credit feature variable interest rates and are available in amounts ranging from $10,000 to $250,000.
For some lines of credit starting at $25,000, you may need to secure the line with a blanket lien on your assets or a certificate of deposit.
Advantages of a Business Line of Credit
Maintaining a line of credit in good standing may help build your business credit rating and position you for better loan terms if you seek future financing. Many small business experts suggest that first-time applicants should start a modest line of credit and pay off the debt quickly as a way of building a credit profile.
Keeping your small business finances running smoothly can often be a challenge in today’s fast-paced world. Depending on your specific business needs, a small business line of credit could be the simple solution you need to meet your goals for growth — at a pace that's right for you.
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