Small Business Line of Credit and How to Use It

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There has been a large increase in the number of entrepreneurs and small businesses, especially by women. A lot of investor organizations and loaning companies have sprouted up to support this growth.

In today’s time and age, there are several ways in which business owners can loan money to invest into their companies. One such small business investor or loan program is the small business line of credit.

What is a small business line of credit?

The most important aspect of being a businessman or businesswoman is knowing the fact that someday your equipment is bound to malfunction, your infrastructure is bound to call for repairing and your business is bound to die away without the presence of occasional and regular capital inflow.

That’s why the business line of credit exists.  A small business line of credit is a cyclical inflow of money. It ensures that you have a certain amount of capital available at your disposal at all times.

Out of the amount credited to your account, you can withdraw whatever amount you need. You will have to pay back that amount with a certain percentage of interest that is charged only on the amount that was withdrawn.

The small business administration, federal grants, online loans, etc are some of the ways in which investors can provide a sufficient amount of capital to borrowers. These forms of loan programs fall under the category of small business loans. Some programs are general and provide basic capital while some are industry specific and focus on certain sectors of the market and society before in terms of lending money.

It can be compared to a business credit card, wherein you have a set credit limit and a certain amount of money pre-installed. You can get access to the money and withdraw from the lump sum amount whatever quantity you need to acquire or replenish your essential goods, and after the payment of the amount has been submitted to the lender along with the interest, the credit limit goes back to normal.

For example, if your business line of credit consists of $5,000 and you wish to withdraw $1,000 for your use, your credit limit will go down to $4,000 which means that you still have an additional four thousand dollars available for usage. After you pay back the $1,000 with a certain amount of interest, your credit limit will go up to the original amount, that is, $5,000.

But, even though business line of credit and credit cards are not mutually exclusive, there is a huge difference in between them. 

What is the difference between business line of credit and credit cards?

First of all, a credit card needs payment every month, whereas that is not the case in business line of credit. Similarly, in small business line of credit you do not get the advantages of lucrative rewards that you might get with a business credit card. Lastly, business small business line of credit works with a cash advance while credit card companies might charge a heavy fee for cash advances.

How does a small business line of credit compare to a common bank loan?

A bank loan is not a cyclical form of money lending. In a small business line of credit, the credit limit replenishes itself with every payment, but a loan does not replenish itself or become available all over again after its payment.

Secondly, a bank loan provides a lump sum amount of money at the very beginning of the term. In such a case, you have a large amount of money at your disposal that you need to start paying for immediately with an interest rate that is charged upon the entire amount.

With a business line of credit, the interest is charged only on the amount you withdraw and not the entire credit available at your disposal so you can use a small percentage and only pay interest on that and save the rest for another day.

Where can you apply for a business line of credit?

You can apply for a business line of credit at a national bank or a regional bank. You can also obtain it from an online lender. 

In the case of a bank, the terms and conditions are usually more affordable, while in case of an online lender the process is much faster and simpler and is more likely to provide you with a loan.

However, the main difference between business line of credit as provided by the bank and online is the requirements that you need to fulfill in order to get a loan.

Usually, banks require a credit score of 680 and above while online lenders look for a credit score of 600 and above. Banks might pay more attention and give priority to those who have been in business for longer than others which is not the case with online lenders.

But before you select where to apply for a business line of credit, there are certain questions you must ask yourself. These are:

1. How soon do you need a loan?

If you are desperate for capital and need a quick and fast cash inflow on an immediate basis then a business line of credit is perfect for you. Plus, an online lender will be able to process your loan faster and provide you with capital in as quickly as one day.

2. Will you be able to pay back the amount?

If your business is not that well established and is still growing, you might take a little bit of time to pay back your loan amount. In such cases, banks are more affordable.

However, banks might have a longer time frame of repayment and therefore you might end up spending more money on the interest amount. In such cases, online lenders are better since they have a repayment plan of six months to one year.

3. Do you meet the minimum requirements?

Before taking any decision you must research thoroughly to find out if you meet the minimum requirements of acquiring a small business line of credit.

A small business line of credit is a very good option for small businesses that need a steady flow of capital in case of damages and immediate cash requirements. We hope this article helped you gain information about the same.