Are you a small business owner? Need to cover a one-time gap in your cash flow? Or maybe you’ve run into an unexpected expense, such as an emergency repair to critical equipment?
In situations like these, a business line of credit can help you secure funds to cover immediate needs.
Business line of credit basics
A business line of credit is a type of financing available to companies that may need short-term infusions of cash to pay for inventory, smooth over interruptions in cash flow or cover the cost of unexpected expenses.
A business line of credit is similar to an individual line of credit, in that you can borrow up to a certain limit—say, $2,000 for a small business that’s just starting out, or up to $100,000 for a more established company—and only pay interest on the funds you actually borrow.
Use our business loan calculator to see how big a line of credit you need.
How is a business line of credit different from a business loan?
In a small business loan, you borrow a lump sum of money at a particular interest rate, and pay it back through monthly payments. Small business loans are often intended to cover one particular expense, such as the cost of a new piece of equipment.
In contrast, a business line of credit provides you with access to funds that you can withdraw whenever the need arises, as long as you don’t exceed your credit limit. As with a credit card, you accumulate interest when you begin to draw on funds from your business line of credit. For these reasons, a business line of credit can be useful for small business owners looking to cover short-term needs.
Is a business line of credit right for me?
Lenders will evaluate whether you qualify for a business line of credit by looking at your business’ financial picture. They will consider your credit profile and annual revenue to determine your credit limit. Many lenders will only lend to businesses that have been operating for a certain amount of time, usually at least one year.
Interest rates for a business line of credit tend to be lower than those offered with business credit cards, with banks generally offering the lowest rates. Opening a business line of credit—and then paying your bills on time—can also be a good way to establish a credit profile for your business.
Check out our return-on-investment calculator to determine your bottom line.
Where can I get a business line of credit?
Business lines of credit are available from financial institutions such as banks and credit unions, as well as from online lenders. When comparing different options for a business line of credit, look at loan amounts, interest rates, loan terms and lending fees. Online lenders may be more forgiving of low credit scores, but may also have lower limits for loan amounts.
To qualify for a business line of credit, you will likely be asked to provide documentation such as personal tax returns, business tax returns, bank account information and business registration documents.
How to use your business line of credit
After your business credit line has been approved, you can start drawing from your credit line, withdrawing as much as you want up to your limit. Every month, you’ll have to make a minimum monthly payment on your business line of credit. Once you repay the amount you’ve drawn from your credit line plus any interest you’ve accrued, those funds will once again be available for you to use.
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