A business line of credit is a flexible form of small business funding that works similarly to a credit card. It allows borrowers to draw on a predetermined amount of funds as needed, paying interest only on the amount actively borrowed. Business lines of credit are typically approved for several months or up to several years, depending on the lender, and are renewable. Unlike a traditional or term business loan, which disburses funds in a lump sum at one time and is repaid with interest, a business line of credit is revolving. As the borrower makes repayments, the amount of credit available is refreshed, similar to payments toward a credit card limit.
Business lines of credit are typically offered as unsecured debt, which means you dont need to put up collateral. However, some lenders may require collateral in exchange for a lower interest rate. Business lines of credit can be used to cover short-term business expenses like paying employees or purchasing inventory. They can also be used to smooth cash flow when facing challenges like work shortages or surviving a temporary dip in sales.
When applying for a business line of credit, borrowers can decide which line of credit is right for their business and then fill out an application either online or with a business banker. Business lines of credit fall into two main categories: secured lines and unsecured lines. Secured lines require collateral, while unsecured lines do not. Business lines of credit typically have variable interest rates, which may be another deciding factor.
