Everything You Need To Know About Business Line Of Credit And How It Works

Posted by mike on December 2nd, 2021

Many small businesses in the US are now reopening gradually after the pandemic, but COVID-19 and its effects on our society are an ever-changing reality. For small businesses, this can make things even more complicated and uncertain.

While growth may not be an option at all at the moment, survival is a priority. But with the market conditions and government guidelines constantly evolving, it can be very hard for small ventures to identify their financial needs right away. This is why a flexible line of credit is perfect for such businesses.

A small business line of credit offers funds for project needs as they arrive, saving the business from the uncertainty that comes with an unreliable cash flow.

What’s A Business Line of Credit?

A business line of credit is basically a flexible financing option for businesses that allows them to access the funding as needed. To put it simply, a business line of credit is constantly revolving, which essentially means that a business can tap into the line over and over again until it hit the credit limit.

Once you use the entire amount, you’re required to pay it back over a specific period along with the interest rates. The sooner you pay back, the less interest you’d have to pay.

In general, a small business line of credit is similar to a small business credit card. It can help businesses finance capital requirements in the short term. This could be for purchasing inventory, equipment repairs, small marketing campaigns, and bridging any seasonal cashflow gaps.

Types of Business Lines of Credit

Broadly speaking, there are two main types of business LOCs. Each has its own terms and benefits.

1.     Secured Business Line of Credit

With a secure line of credit, a business can pledge certain assets as collateral for the line. These assets are usually short-term assets like inventory and account receivables instead of capital assets like equipment. This is mainly because a business line of credit is a short-term liability.

If the business is unable to pay back the line of credit, the lender can take over the collateral assets and have them liquidated to pay off the unpaid amount.

2.     Unsecured Business Line of Credit

With an unsecured business line of credit, no specific assets are required as collateral, but you need a general lien or a personal guarantee instead.

But since there are no collaterals involved in the form of assets, your business might need a stronger credit profile to be able to qualify for this type of line of credit.

Moreover, unsecured credit lines have higher interest rates and typically last only a short while.

Benefits of A Business Line of Credit

A business line of credit offers your business much-needed working capital. This is essentially the difference between your current assets and current liabilities. So, it’s the amount your business can spend (minus any short-term debts).

Being short on working capital can be a challenge when running a business. It’s supposed to help you with everything from payrolls to inventory maintenance and utility bills. A line of credit can work as your working capital when you’re in a tight spot financially.

Here are a few other benefits of a line of credit that are worth considering.

Better Cash Flow in Off-Seasons

If your business is having problems with cash flow, a business line of credit is exactly what you need. For certain businesses, there are slow seasons when cash flow can become a real problem. With the pandemic still looming in the backdrop, this is a reality for most businesses right now. So, a line of credit can really help to balance things out.

Just Pay for Whatever You Use

Credit lines are pretty flexible and allow you to use only the amount you need. And the best part is that you only need to pay interest on that figure instead of the amount you originally agreed upon.

Moreover, credit line agreements allow businesses to pay early without any prepayment penalties.

Boosts Business’s Adaptability

Small businesses are often faced with choices when they’re offered opportunities for growth, but with a very short time limit for response. A lot of times they need urgent funds to make the most of the opportunity being offered. A credit line gives them the flexibility to adapt quickly.

Helps to Build Business Credit

If you’ve got a bad credit history, a line of credit is the perfect way to fix things. A business line of credit can help to boost or maintain a credit score as long as it’s paid on time. Having a good credit score would help you get lower interest rates in the longer run.

Common FAQs About Line of Credit

How Does A Business Line of Credit Differ from A Term Loan?

Both financing options have stark differences from a lender’s perspective. For starters, a term loan is based on a fixed sum of money which your business would receive as a lump sum right away once it’s approved. On the other hand, a credit line works like a credit limit that allows the business to borrow against it, repay, and then reuse over a fixed period.

Who offers Business Lines of Credit?

Lines of credit are offered by all kinds of banks that offer their services to small businesses. This includes commercial banks and community banks as well.

But we suggest looking into alternative funding sources for small businesses for instance online lenders like QuickAssist.

They’re one of the most reliable alternative financing companies in the US and can help you with a small business line of credit.

Contact them today for more information.