What is a line of credit

(Last Updated On: March 9, 2022)

A business line of credit is a revolving line of credit that allows you to borrow up to a certain limit and pay the money back over time. 

The best way to understand how a business line of credit works is to think about it as a personal line of credit. A personal line of credit (or credit card) is like having a reserve of cash that you can access whenever you need it. You can borrow up to a certain limit and then pay the money back over time. 

A business line of credit works the same way. You can borrow up to a certain limit and then pay the money back over time. The key difference is that a business line of credit is for businesses only. 

A business line of credit is a great option for borrowers that need access to working capital on a short-term basis. For example, if you need to make a large purchase, buy inventory, or pay for unexpected expenses, but don’t have the cash available, you can borrow money from your business line of credit to make the purchase. Then, you can pay the money back over time by making monthly payments. You only pay interest on the amount of money being used, not the entire amount borrowed. Some lenders will have a monthly maintenance fee or annual fee for keeping the account open. 

Different Types of Lines of Credit

Credit lines typically come in two forms: a secured line of credit and unsecured line of credit. 

Unsecured lines of credit are riskier for the lender, so they come with a higher interest rate because the lender has no security if the loan isn’t repaid.  These unsecured lines of credit constitute the most prevalent type of revolving financing for small businesses.

secured line of credit, on the other hand, is backed by collateral. This could be a piece of property, such as a house or a car, or it could be a certificate of deposit (CD) or savings account. 

The advantage of a secured line of credit is that the interest rates are usually lower than those for an unsecured line of credit. This is because the lender has more security if the loan isn’t repaid. 

How to Get a Business Line of Credit

The best way to get a business line of credit is to apply through a lending institution. 

When you’re applying for a business line of credit, the bank will want to know how you plan to use the money. They’ll also want to know your credit history and your business’s credit history. 

If you have a good credit history, you’re more likely to be approved for a business line of credit. And if you have a good business credit history and a high personal credit score, you’re more likely to get a lower interest rate. 

It’s important to remember that a business line of credit is not a loan. You don’t need to use it all at once and you don’t need to pay it back all at once. You can borrow as little or as much as you need, and you can pay the money back over time. 

A business line of credit can be a great way to free up cash flow when you need it most.