Business Line of Credit

A business line of credit is a revolving line of credit that offers a business owner certain flexibility and advantages a regular small business loan can not provide.

An unsecured business line of credit is a tool for business owners to access money on demand for all business expenses as they arise with no restrictions on usage.

A business loan has a one-time lump sum disbursement and the borrower is expected to begin making recurring monthly payments on the full balance of the loan immediately. However, with a business line of credit, there is no lump sum disbursement. Thus, the borrower will not incure monthly interest charges and won’t have monthly payments; unless the borrower draws from the business line of credit.

A $50,000 business line of credit means the business owner can draw (borrow) up to $50,000 at any time. So, if the business owner decides to spend $20,000 on new inventory, they will withdraw the $20,000 and have access to the remaining $30,000 for future use.

The monthly payments on a business line of credit are based on the withdrawn amount or balance. If we use the example above, the payments will be based on the $20,000 the business owner withdrew to buy new inventory. If they use another $10,000 in the future, the payments will increase to factor in the additional $10,000 withdrawn. The payments will always adjust as the balance increases.

With a business line of credit, a business owner can keep drawing and repaying the line of credit as often as they’d like. For example, if a small business owner draws $28,000 on a $30,000 line of credit, they’ll only have $2,000 available for future use. However, if they pay back $10,000 of it, they’ll have $12,000 available for future use.
They can keep doing this as long as they make on-time payments for the withdrawn amounts and don’t exceed the credit limit.

Online lenders usually have fewer qualification requirements than traditional lenders. Traditional lenders require solid financials, tax returns, profit and loss statements, high personal credit ratings, and other documents before approving a business line of credit.

Business lines of credit offered by online lenders have much fewer requirements for qualification. For example, instead of asking for tax returns, several bank statements will usually do the job, no need for personal and business tax returns. Personal credit scores don’t play a huge role, and the business has to be established for only a year. Overall, the process is streamlined and much faster.

The lax requirements of online lenders pose a higher risk of default, which is likely to result in higher rates for high-risk borrowers. No one likes to pay more, but paying higher fees and having access to funds quickly, far outweighs the downside of losing business for lack of access to money or credit.

With a business line of credit, a borrower can skip the downtime of requesting a business loan and getting approved every time they need money for business expenses.
Think of a business line of credit as money on demand at with no interest charges as long as the borrower doesn’t draw.
All businesses, regardless of size, should have a business line of credit as insurance for unforeseen or unpredictable expenses associated with running a business.