A business line of credit is different from other types of small business funding options. Most other financing options are taken out for a specific need. For instance, short term funding is usually used to address a sudden expenditure. Long-term funding tends to be used for long-term investments. A business line of credit is different because it’s acquired before there’s an actual need for the funding. The line of credit can be drawn from when funds are needed, but doesn’t require you to pay interest when you are not using it.
When you want a personal line of credit, you get a credit card. Businesses have a similar option with a business line of credit, which can be tapped into whenever you need extra funds. A business line of credit is different from a credit card in that they typically have lower interest rates, although that can vary by lender. Here are the main points:
Your lender will decide how much money you will have access to through your line of credit. You don’t have to pull your entire line of credit every time you need extra funds. There will likely be a minimum withdrawal amount, though.
A business line of credit offers a solution to a problem before there’s actually a problem. That means you won’t have to scramble for funding when you encounter a cash flow gap. You may even pay less interest than if you used a business credit card.
After you secure a business line of credit, it could count against you when you apply for other funding. Potential providers might see the line of credit as a liability. A provider has to count your line of credit as debt even if you aren’t currently using it. So you could get turned down for other funding if you have an active line of credit.
A line of credit isn’t always as simple as it sounds. Many providers will require you to give updated financial records every time you want to borrow money. If your credit score is low, a provider might also require you to offer some sort of collateral.
You shouldn’t use a line of credit for long-term financing. If you do, you run the risk of not having the line of credit if an emergency should arise. The line of credit should be used for short cash flow gaps that can be paid back quickly.