business line of credit

What Is A Small Business Line Of Credit? Everything You Need To Know In 2022

Small Business 5 Mins Read July 6, 2022 Posted by Mashum Mollah

Owning a business is a major headache. Especially, when it comes to the finance part, you need access to the working capital to grow. The most successful small businesses also go through urgent unplanned expenses, late invoice payments, less cash flow, and many other short-term difficulties.

A one-stop solution to these troubles?

Well, it?s a small business line of credit!!!

What is it? We will be discussing it in the sections below. Keep reading till the end.

What Is A Business Line Of Credit?

To be very specific, a business line of credit is a flexible loan for businesses working as credit cards. The company draws money from the credit lines as and when needed and pays the interest on the portion of money borrowed. While they repay the borrowed amount, they replenish they refill the funds available.

  • Tip: When it comes to accessing these funds, you can do it using a credit card, a business checking account, or a mobile application.

How Does A Business Line Of Credit Work?

How Does A Business Line Of Credit Work

A Business line of credit is very similar to business credit cards since they allow small businesses to access funds when needed. The interest rates on the business line of credit are generally lower than that of business credit cards. Lenders set the interest rates and credit limits on the basis of the factors related to annual revenue or the current owner.

A secured line of credit uses collateral you own as an assurance for your loan. If you don?t repay the loan, the lender could take the collateral to meet the debt. On the contrary, an unsecured line of credit doesn?t need collateral which makes the repayment quite expensive.

How Could You Benefit Yourself From A Business Line Of Credit?

How Could You Benefit Yourself From A Business Line Of Credit

Line of credit for small businesses is a flexible loan that they can acquire from financial institutions or banks. Small business owners have the ability to access funds through this as and when needed.

This is the first and foremost benefit of the business line of credit.

Apart from this, there are several other advantages a small business owner can enjoy from a business line of credit:

1. Flexibility

One of the most crucial benefits of a business line of credit is its flexibility. This means that it?s possible to access the cash at regular intervals. The line of credit now makes all the funds available and you can use them as soon as you need them to use.

2. Control

You can make use of a line of credit whenever and however you see it as fit: in order to cover the gaps needed in the cash flow. The ongoing operational costs or liberal repayment structure are also incorporated in this.

3. Approval

For availing of the line of credit, you shouldn?t always need a high credit score or collateral. This makes the line of credit a major alternative when you don?t get any traditional loan.

4. Business Credit

With the help of a line of credit, you can easily maintain a good credit score. Nevertheless, make sure that you are making the payments on time and keeping a very low account balance. You will see how the credit score goes up in this way.

5. Business Growth

In this highly competitive environment, the business has to adapt to a plethora of dynamic business needs. In this reward, the line of credit ensures that your business is smooth enough.

6. Cash Outflows

The line of credit for small businesses ensures you have a healthy flow of money. It promotes unforeseen opportunities and changes the market demand as well.

Compare, And Contrast Between Secured Vs. Unsecured Credit Lines

Contrast Between Secured Vs. Unsecured Credit Lines

If you don?t know, a business line of credit is basically of two types – Secured and Unsecured Lines.

Nevertheless, these two are very different from each other. How?

Check out the table below:

Secured Business Line Of CreditWith a secured one, the borrower has to pledge the assets as collateral.

It?s a temporary liability and the lender may accept accounts receivable and inventory as collateral. When the time comes and the business fails to meet the credit of the loan, the lender will take the collateral. 

Unsecured Business Line Of CreditMost businesses owners are looking forward to getting a line of credit.

Frequently Asked Questions (FAQs):

Q1. What Credit Score Do You Need For A Business Line Of Credit?

Your credit score matters a lot while obtaining a business line of credit. It illustrates the chances of defaulting. While the lenders need a personal credit score of around 680, some of the lenders even accept lower scores as 580 to 600.

Q2. How Long Does It Take To Get A Business Line Of Credit?

It may take anywhere from a day to several months to get approval for a business line of credit. As a thumb rule, the online lenders are faster than the banks, while the banks are also speedier than SBA.

Q3. What Is The Difference Between A Line Of Credit And A Business Loan?

While the business line of credit gives you a pool of finances to dip into, the business loan gives a one-time lump sum. From a business loan, you will owe interest on the full amount of money. With a business line of credit, you will have to pay interest on the usable money.

Q4. What Will Happen If You don?t Use Your Line Of Credit?

If you don?t use the available credit or use a small percentage, the effects can be of two types. Either it will lower your credit utilization rate or improve your credit scores.

The Final Takeaway

A business line of credit might just be just the tool to set a stable flow of cash to your company. It?s the short-term needs when the majority of cash deficit can be seen. A line of credit is more flexible than the small-business loans offering higher limits and lower rates.

That?s why it’s better than credit cards.

But before going for a line of credit, make sure it?s right for your business?s needs.

Any questions, drop them in the comment section below.

Any opinions? Just leave them below for us to read.

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