What Is A Business Line Of Credit?
Like a traditional small business loan, a business line of credit gives you access to a certain amount of financing. You don’t make payments or incur interest, however, until you actually use the funds. So, if you don’t borrow any funds for one month, then your balance for that month is zero.
Interest rates for a business line of credit are typically lower than a small business loan of the same amount. But, if you are late with a payment or go over your borrowing limit, your interest rate will likely increase significantly. The quicker you pay off the balance for a business line of credit, the lower your interest rate will be. A higher balance means you’ll have less to borrow when the need for funding arises.
Business lines of credit can be “revolving” or “seasonal,” which means they can be used over and over again. If you have a $25,000 line of credit and borrow $10,000, the remaining $15,000 is still available. In additon, if you were to pay off your entire $10,000 balance so that your balance is back down to $0, you would gain access to the entire $25,000 without having to apply a second time.
For these reasons, a business line of credit is often compared to a credit card. Once you pay off the credit limit, you can borrow more funding.
What Do I Need A Business Line Of Credit For?
Business lines of credit are most advantageous for short term, medium sized investments. If you use a business line of credit for a long-term investment, you won’t have access to the funds in the event of a cash flow problem. And you won’t be able to capitalize on new, lucrative opportunities that require a little extra cash than you have on hand.
Let’s say an item from your store is selling at an unexpectedly explosive pace. You need to order more to meet demand but your vendor needs to be paid upfront. With a business line of credit, you could secure the inventory and then pay off the balance with the money you make from the high volume of sales.
Another common dilemma that can be easily alleviated by a business line of credit is having to cover a regular business expense, like payroll, before you are compensated for a recent project. You could use a business line of credit to cover payroll and then pay off the balance as soon as your full payment comes in.
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United Capital Source advises small business owners to think of a business line of credit as an insurance policy for your business when it is suddenly and/or temporarily cash-strapped. They do this primarily because you will likely not be approved for a business line of credit if you apply when cash flow is in bad shape or you are in a financial emergency. The best time to apply for a business line of credit is before you need it, or when your business is doing well. Apply now to see how much you qualify for!