There’s a lot to juggle when you’re a business owner, including how to finance your business purchases. Whether you’re needing to finance inventory purchases, equipment or other business expenses, a business line of credit can be a great option for short-term financing. We’ve put together a guide to help answer your questions and decide if a business line of credit is the best choice for you.
What is a Business Line of Credit?
A business line of credit is a resource available to help provide funding and working capital that borrowers can use to start, grow, or improve their businesses. This can help companies grow and enable businesses to achieve their goals when they need additional funding. The funds can be used for your business needs, including inventory, office supplies, equipment, marketing, and more. This short-term funding can be a great source to tap into.
How It Works
A business line of credit works similarly to a credit card, the borrower can use funds as needed up to a set limit and then repay them. The line of credit provides cash funds that can be utilized by the business. Once those funds are repaid to the lender, the borrower can once again borrow the funds up to the limit. A repayment schedule is set up for the borrower to repay the funds, often set as a weekly or monthly payment. Included in the repayment schedule is the interest, which is what the borrower pays the lender in return for allowing them to borrow the funds.
There are two different types of business lines of credit – secured and unsecured. This is in reference to the collateral that can be claimed by the lender should the borrower be unable to repay back the borrowed funds. Secured lines of credit are secured by collateral, while unsecured lines of credit are not. Even though it may be unsecured, you may be required to provide a personal guarantee or a lien on your business.
How to Qualify
In order to utilize a business line of credit, you’ll first need to qualify for one. This will include filling out an application, providing information and documentation, and the lender running a credit check. This information will likely include personal and business taxes, bank account information, financial statements, and business plans.
As a borrower, you’ll continue to access the line of credit in the future and be responsible for paying back those funds, so the lender will likely also request business history and revenue information. Many lenders will require that you have a decent personal credit score to qualify – especially if the business is new. A good or great credit score can help save you money on interest by qualifying you for the best rates available.
Businesses that are more mature, having a decent business history behind them, are an especially great fit for this funding option. They can prove their history and reliability for borrowing into the future. This means that they may also be able qualify for higher limits, making it a more convenient option with the funds are available to borrow when they need them.
Alternative Options
A business line of credit can be a great resource for business owners, especially when it comes to flexibility in funding. This is a great option for businesses with larger, recurring, or ongoing expenses. There is the option to use the funds, pay them back, and then borrow them again, allowing the borrower to cover the recurring expense.
However, if a business line of credit isn’t the best fit for your business, there are other options available that might make more sense. For example, a business loan can provide you with a lump sum amount – you’ll receive the funds all at one, and you may be able to receive a higher amount overall. Another option is a business credit card. This can be used for smaller, recurring expenses and may be a better option for newer businesses who may struggle to qualify for the line of credit.
If you’re looking for an option to finance some of your business expenses, a business line of credit could be the resource you’re looking for. For a more in-depth comparison between a business loan and a business line of credit, check out this guide.
