What is a Business Line of Credit?
A business line of credit or a commercial line of credit is a small-business loan. Much like a credit card, the lender creates a limit. Unlike term loans, where a borrower repays a one-time sum over a fixed period, a line of credit allows borrowers to renew the same loan.
Borrowers pay for the amount they use and don’t pay interest on any unused funds. For example, suppose your limit was $10,000. If you use $5,000 of that, the interest rate will apply to the $5,000.
A business line of credit is a flexible option for borrowers. Lenders for other types of loans tend to charge extra for early repayments. Most lenders for lines of credit don’t add a penalty and allow borrowers to save interest costs.
Business Line of Credit
Secured Vs. Unsecured
A secured business line of credit requires collateral. A lien agreement allows the lender to take possession of the collateral, such as machinery or property if the borrower defaults on payment.
Most business lines of credit are unsecured, which doesn’t require collateral. However, the company or owner offers a guarantee. Guarantees hold the business or owner responsible for repayment.
Secured Vs. Unsecured
The Small Business Administration (SBA) government agency funds long-term and short-term loans. An SBA line of credit offers low-interest rates.
There are four options for an SBA line of credit.
- Working Capital Line of Credit
- Seasonal Line of Credit
- Contract Loan
- Builders Line of Credit
How can I use a Business Line of Credit?
The type of commercial line of credit determines how you can use the funds of your small business line of credit
Capital Line of Credit
A Capital Line of Credit is a business line of credit used for operating expenses, including rent, inventory, or payroll. If your business experiences unexpected revenue gaps, a small business line of credit can help maintain normal operations
Seasonal Line of Credit
When you need to cover short-term expenditures or unexpected expenses, you need a business line of credit that doesn’t restrict your funds to operational costs
Builders Line of Credit
Small businesses use a Builders Line of Credit for renovating or constructing residential or commercial buildings. Borrowers use the funding for resources, including materials, equipment, and labor.
A business line of credit is more accessible for newer businesses and can help you acquire the advance you need to grow. Whatever you need to boost your business, there’s a business line of credit that can help you accomplish your goals.