What Is Business Line of Credit?
A business line of credit is a type of loan that provides access to working capital for businesses. It is different from a regular loan because it provides the flexibility that regular loans do not. A loan allows you to borrow a sum of money at once with the condition that you will pay back the entire amount borrowed, with interest, over a fixed period of time. A business line of credit lets you borrow against a predetermined limit, as you need it, and you only have to pay back interest on the amount you use.
How does Business Line of Credit Work?
Imagine owning a credit card. With a credit card, you have access to funds, and only pay back what you spend, not the entire amount of money available. A business line of credit works in a similar way. You get access to a total sum of money, called your credit limit, but only pay back the amount you spend. For example, if you had access to a LOC with a credit limit of $15,000 but only spend $4,000, then you would have to pay back only $4,000 and the interest on that. This creates flexibility that a regular loan just doesn’t give because even if you only spend $4,000 out of a $15,000 loan, you would have to pay back the whole $15,000, with interest.
The Advantages and Disadvantages of Business Line of Credit
- You only pay for what you use.
- You only need to apply once, after which you can renew as needed.
- Credit limits can be very high depending on your bank or lender. This means flexible access to more money.
- Requires collateral.
- You must have an established business with a business income.
- Banks reserve the right to reduce your line of credit.
- You cannot increase your credit limit if you require more funds.
What are the Qualifications for Business Line of Credit?
Traditional institutions like banks and other established lenders have strict rules and minimum qualifications that must be met before LOCs can be extended to small businesses. Such requirements are:
- Your company must have been in existence for a minimum of 2 years.
- Your business must have revenue and must be profitable.
- Your business must have a corporate guarantor, a company that guarantees repayment.
- Your company must have available collateral to secure the loan.
How to Obtain Business Line of Credit for Your Small Business?
A line of credit can be obtained by filling out a form at the bank or lender of your choice. The process can be a bit tedious for traditional lenders, but there are online lenders with less rigorous requirements and obtainment process but these ones have higher payback rates and smaller credit limits.
Types of Business Line of Credit
There are majorly two types of business line of credit; a secured line of credit and unsecured line of credit. A secured line of credit is one that is backed up by collateral while an unsecured line of credit is one that is not backed by collateral. In the unsecured line of credit, the lender takes the borrower’s word that he will repay the debt. It is difficult to get an unsecured LOC unless you are an established firm or you have a high credit rating.