Business Lines of Credit: An Introduction

Majority of small and start-up business owners are aware of very limited options in funding their businesses. These include business credit cards, term loans, and equity financing, which are among the more popular financing options available today.

However, there is one exceptionally advantageous option that is often overlooked simply because it is not as common and as popular as those mentioned above. It is called the Business Line of Credit.

Like many small business owners, your first thought upon discovering how a Business Line of Credit works, would probably be why not too many start-up and small business owners use this type of financing.

Business Line of Credit Explained
To put it simply, a business line of credit offers a two-pronged benefit. First, it lets you easily access the funds you need without the usual costs that come with the other more popular options. Second, it helps you get out of unexpected financial problems or help you take advantage of sudden opportunities.

Typically unsecured, a business line of credit is similar to a business credit card from where you can draw the money you need anytime. You will only be required to pay back a minimum amount, depending on your balance. You will be charged for interest only on the borrowed part of your credit limit. This is why, technically, a business credit line can be called a revolving line of credit.

As a small business owner, having a small business credit line should be among your top priorities. It has been proven to be critical in the success of a small business.

Compared to other available small business loans, a business line of credit doesn’t require you to apply every time you need to use a part of your approved credit limit. This is important as according to the SBA (Small Business Administration), a small business must have easy access to cash to grow and survive.

In addition, most online lenders are lenient with small business line of credit applications and renewals. They don’t require tax returns and financial statements, unlike traditional loan providers.

With most credit options, not providing financial documents may mean a smaller credit limit. This cannot be said of the best lines of credit for small businesses that offer the best solutions for a small business’s short-term financing requirements.

How a Small Business Line of Credit Works
When you draw funds from your approved business line of credit, you will be required to pay the interest and a minimum amount, just like with regular credit cards. Your first payment due date is typically at the end of the month or billing cycle, depending on the creditor.

If you pay the entire balance on time, your credit line will be replenished back to the original amount. For instance, if you have a $1,000 line of credit and you borrowed $100, when you pay $100 plus the billed interest for the billing cycle, your available credit will go back to $1,000.

There are cases when the lender charges a minimal fee (such as a draw fee) each time you draw from your credit line. This usually ranges between 1.5% and 2.5%.

Although there is a set repayment term, it usually pertains to the total balance. This means when you repay the full balance before that date, you will have access to the entire line of credit again. Many lenders even allow early settlement of the entire balance to save on interest. When you always pay the entire balance, or at least the required minimum, on time, you practically get to keep the credit line for life.

Credit limits typically range between $1,000 and $250,000, while interest rates are usually 8% and up, with payment terms as long as 18 months.

An unsecured business line of credit usually comes with a higher interest rate and a lower credit limit. While there is no collateral, you may need to provide a signed personal guarantee. If you need to enjoy a bigger credit limit, you may need to put up a collateral like a piece of real property.

If you have questions or concerns, contact us for a Free consultation about Business Lines of Credit.