Small business owners can use this business line of credit calculator to figure out just how much it will cost them to draw money on their line of credit. Business lines of credit are important tools for many small businesses, as they allow for a readily-available source of business financing that doesn’t require monthly payments on cash that hasn’t been spent.
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Unlike a normal business loan, business lines of credit are not deposited as a lump sum upfront payment when the loan is approved. Instead of a loan amount, the lender will offer a credit limit, and the borrower is able to draw on the line of credit for any amount up to that limit.
When you receive a typical loan, you usually start to pay interest on the total amount, immediately. You make monthly payments, and interest accrues on the outstanding balance. That means that the quicker you pay back the loan, the less you’ll pay in total interest. You’ll have an agreed-upon repayment term, and the length of that term will determine the size of your payments.
Not so in a business line of credit. You won’t need to pay any interest until you draw on your credit. That’s why many businesses take out a line of credit and then reserve it: if times get tough, if cash flow runs low, or if there’s an unexpected opportunity, businesses with a line of credit will have access to the capital they need.
How Can You Use a Line of Credit?
Unlike other types of loans, like equipment loans, lines of credit don’t need a perfectly spelled-out purpose. Instead, you can use them for a number of business needs:
- Working capital
- Loan payments
- Staff wages
- Equipment repairs
How to Get a Business Line of Credit
Once you’ve decided you want a business line of credit, you should approach the application just like you’d approach any other loan application. There are a few steps you should keep in mind.
Check your credit and eligibility. While lines of credit don’t work exactly like most small business loans, lenders will still evaluate your company for credit before you have access to funding. So check your business credit scores and take appropriate steps to improve them, if feasible. Higher credit scores lead to lower interest rates. In addition to credit, many lines of credit have other eligibility standards. They may want you to have been in business for a certain number of years, or have a certain amount of income.
Find the right lender. Whether you go with a traditional bank or an online lender, you’ll find differences between each line of credit. Whether you’re looking for a particular loan term, a lower interest rate, or collateral requirements, there is likely to be a lender willing to work with your company.
Be aware of fees. In addition to interest, you’ll probably need to pay an origination fee, an annual fee, and sometimes small fees when transferring money from the credit line.