What is a Business line of credit?
A business line of credit is one where the financial institution grants access to a specific amount of financing to a business. However, no interest is incurred on the funds until they are tapped into. Unlike term loans, business line of credit can be utilized by the businesses when they choose to. The interest is paid only on the utilized funds and the balance funds are available for use at a later time.
For instance, if the total approved line of credit is $50,000 and $25,000 is tapped into, access to the balance $25,000, if necessary, remains. If the utilized amount of $25,000 is paid back, there is access to the entire $50,000 without having to reapply, one of the biggest benefits of a line of credit.
A business line of credit can be unsecured (without a collateral or security) or secured (typically, by inventory, receivables or other collateral) depending upon the health and wealth of your business. Lines of credit are often revolving and can be tapped into repeatedly.
The funds available with business line of credit is usually lower than other typical loans available to small businesses. Hence these funds are mostly used for immediate expenses like cash flow, working capital or for buying stock.
Typically, business lines of credit are more suited for businesses that have been in business for longer, have a higher credit score and have a stable monthly turnover.
Who can qualify for a business line of credit?
Any business that needs a continuous influx of funds, qualify for a business line of credit. Listed below are some scenarios to understand the qualification criteria better.
- Businesses that want flexible funding solutions
- Small businesses looking for quick funding options
- Businesses without any assets and collaterals to avail secured loans
- Businesses with lower credit scores
Advantages of Business Line of Credit
- Once approved, funds can be utilised anytime
- Use only the amount required
- Interest paid on the utilised amount only
- Businesses with lower credit score can also qualify
- Options available for new businesses
- No reapplication required
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