How Business Lines of Credit Work

It’s not always necessary to apply for a traditional bank loan for business capital needs. While SBA loans and other long-term loan types offer excellent terms for large purchases of machinery, vehicles, and real estate, they can take longer for approval than alternate financing methods. If you need to obtain capital quickly, business lines of credit may be a better option.

What Are Business Lines of Credit?

A business line of credit is similar to having a personal or business credit card, except you don’t need an actual card for purchases. This type of financing offers the fast approval and flexibility of credit cards, but generally with better terms. 

After your application is approved, the bank or financing company assigns your business a set amount of credit, such as $20,000. Anytime you need to make a purchase, you can draw against this total amount, paying it back just as you would a monthly credit card bill. Your company can use this credit for multiple transactions simultaneously, up to the total credit assigned. After paying back these amounts, you’re free to reuse the credit for additional purchases.

How Do You Apply for a Business Line of Credit?

It’s not hard to find options for business credit. This type of financing is usually available from the same institution you use for term loans or SBA loans. Each bank has specific requirements or steps for the application process, but they’re usually straightforward.

Expect a credit check of your personal and business finances. You may also need to show a certain time in business, specific cash flow or minimum revenue amount. These factors are often used more for determining the credit rate and amount offered.

What Are the Advantages of Business Lines of Credit?

A major draw of this type of financing is the freedom it offers to business owners. Once approved, you can use the credit however you see fit, whether for employee payroll, emergency expenditures, taxes, inventory purchases or anything else required to stay in business. You don’t need to ask for bank approval before using the credit in these ways.

You can use up to the full amount of the credit offered, but you’re not obligated to. Business lines of credit also offer some financial benefits, since you only pay interest on the amount of capital used, not the total sum you’re approved for.

Another advantage of this credit is the speed that you’re able to obtain working capital. Similar to having a credit card, you don’t have to wait days or weeks for the go-ahead to use the money. It’s always ready to go. 

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