What Is a Business Line of Credit?
A business line of credit is a revolving loan that works similarly to a credit card. It offers a fixed amount of capital, which you can use to meet short-term business needs as and when they crop up.
There could be various reasons why your business needs to take a loan. Some of them could be as follows:
- Purchasing inventory
- Repairing equipment
- Paying salaries
- Financing marketing efforts
- Bridging a seasonal cash flow gap
A business line of credit allows you to withdraw as much as you want, up to its credit limit. With this credit line, you pay interest only on the portion of the money that you borrow and not on the entire credit limit. The amount you borrow has to be repaid in periodic installments.
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In a nutshell, when your business often demands funds to meet its day-to-day capital requirements, you should consider getting a line of credit.
There are two types of business line of credit: secured and unsecured.
Secured Business Line of Credit: This type of credit line requires you to pledge specific assets as collateral. If you, for any reason, are unable to repay the borrowed amount, the lender can seize your assets to pay off the balance.
Unsecured Business Line of Credit: This type of line of credit does not ask for collateral. But since it is unsecured, you need to have a strong credit profile with a positive business track record to qualify. The interest rates in this type of credit line may be slightly higher and the credit limit a slightly lower as compared to a secured line of credit.
How does a business line of credit work?
When your business line of credit is approved, you get access to a fixed amount of funds to use as you wish. As mentioned above, you will be charged interest only on the amount you borrow from your credit line. Once you start using it, you will have to repay the borrowed amount periodically. Usually, the repayment schedule is set up for monthly payments. You can keep repaying it and reusing it as many times as you want, as long as you keep making payments. There may be additional charges like processing fees or transaction fees applied to your line of credit.
How to qualify for a business line of credit?
Traditional lenders, such as banks, are very stringent with their eligibility criteria when it comes to qualifying you for a business line of credit. You need to have a profitable business with at least a few years of business existence. Typically, banks ask for the following documents: business financial statements (profit and loss statements), bank account information, personal and business tax returns, etc.
It is not easy to qualify for a business credit line from a traditional bank, especially if you are a new startup. If you don’t meet the eligibility criteria or are rejected for a business credit line, all is not lost. You can always look at other finance options. Online lenders/lending platforms have easy to meet eligibility criteria. So, if you have a good credit score, you can take a personal loan for businessman to finance your business requirement. Or, if you are keen on getting a credit line, you can opt for a personal line of credit for business.
Author bio
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics, so email him your questions at shiv@moneytap.com.
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