What Does “Business Line of Credit” Actually Mean?
The term “business line of credit” describes a credit line which can only be used by business owners. These lines of credit are provided by lenders including banks, direct lenders, and other alternative business financing companies.
A business line of credit operates similarly to lines of credit required for personal use, in that a credit line is provided with a determined maximum that business owners can withdraw from.
This withdrawal limit is determined by many factors, including the qualification standards set by the lender who provides you with your credit line, as well as your FICO score, the amount of annual gross sales your business makes, and the total amount of time your business has been active.
How Does a Business Line of Credit Work?
- Step 1: Get approved for a credit line through a bank or alternative lender. Typically, banks require higher FICO scores, greater sales volumes, and longer times spent in business to qualify for a credit line than alternative lenders.
- Step 2: Gain immediate access to cash on-hand. Different from a business loan, in which you’re obligated to eventually use all the funds borrowed, you can withdraw whatever amount you need from your credit maximum at a time. Any funds you do not use will be available for you whenever you need it.
- Step 3: If you obtain a revolving business line of credit, you have the option to replace any funds used back into your credit line, where it will become available again for future use. This is extremely useful among business owners that always need to be prepared with cash on-hand to take immediate action on unexpected challenges and opportunities.
- Step 4: With a business credit line, you only have to pay for the amount of funds you use. This provides excellent protection against over-borrowing or over-spending, which can be a common problem business owners have with using traditional funding methods including SBA loans.
Types of Business Credit Lines
There are many types of business lines of credit available for business owners, including:
- Secured Business Lines of Credit: Credit lines that are leveraged by assets held as collateral by the business owner. The reduced “risk” lenders take on due to securing their capital typically results in terms that are more desirable for the borrowing business owner.
- Unsecured Business Lines of Credit: A credit line that does not require collateral in order to get approved. Through certain alternative financing companies, these can come with terms that are just as desirable if not more so than secured business credit lines.
- Revolving Business Lines of Credit: A credit line with “revolving” terms, meaning a business owner can replace any amount of funds they withdraw back into their credit line, where it will become immediately available to use again.
- Accounts Receivable Lines of Credit: These are nearly identical to revolving credit lines, with the key difference being that the credit line is leveraged by the receivables belonging to a business owner. These are known for their low prime lending interest rates+, and flexible financing terms.
Each type of credit line comes with unique terms that help business owners meet their unique goals in different ways, and conform to their specific business model.
When considering using a business line of credit to fund your business, make sure you explore all your options in order to find the financing option that best fits your specific needs.
Top 3 Advantages of a Business Line of Credit
There are several advantages to having a business line of credit that no other financing option can provide. Here are the top 3 ways business lines of credit help business owners accomplish their funding goals faster and easier:
- Your company can have a steady flow of cash during periods of lower revenue.
Let’s say that you own a retail store that is seasonal. Most of your sales may come during the holidays or over the summer. Other times of the year, your business may be short on cash which makes paying employees very challenging.In these cases, a business line of credit provides a fast and simple way to bridge gaps in cash flow, and keep your operations running smoothly. - It helps your business take advantage of opportunities faster.
For example: a manufacturer is informed the prices provided by his or her supplier will drop for a limited time. The manufacturer will want to purchase products at a discount. However, at the time, he or she may not have the available capital to do so.By opening a business line of credit, they minimize the likelihood of missing such a great opportunity. - You can bolster the credit history of your business.
By maintaining a line of credit that’s in good standing, you may be able to increase your business’ credit rating. The better your rating, the better the loan terms for which you will qualify. This is especially important if you have a need for future financing.