A business line of credit gives new businesses flexibility not available with a traditional business loan. This type of financing lets you borrow money up to a certain limit (credit limit), and you only have to pay interest for the amount you’ve borrowed. It’s a great resource for managing your cash flow, buying equipment and paying for miscellaneous expenses.
How It Works
Whereas term loans provide your business with a lump sum of cash upfront to repay over a period of time, a business line of credit functions just like a credit card. You have the flexibility to use it and repay it on an as-needed basis, as long as you do not exceed your allotted credit limit. You are required to pay interest on the amount you spend. For example, if you have a credit line of $100,000 and you’ve spent $20,000 of it, you’ll have to pay interest on the $20,000. However, most lenders won’t charge a prepayment fee so you can repay your balance earlier to minimize interest costs. For a business line of credit, you can borrow from $5,000 up to a maximum of $250,000, with interest rates typically ranging from 7.65%-23.99%.
Why You Might Need It for Your Business
Businesses need a steady stream of working capital in order to run their operations. Whether you’re looking to expand your business, purchase new equipment or bridge a cash flow gap, a business line of credit will help you cover these expenses, simply and easily.
Here are other ways you can put a business line of credit to work on your behalf:
- Purchasing new equipment or machinery
- Hiring new employees in order to accommodate the growing demand for your business
- Purchasing additional inventory to prepare for the busy seasons
- Branching out to several new locations or expanding your office space
Since you can use a business line of credit on an as-needed basis, most business owners use it as a safety net in times of slower seasons – most commonly to make payroll and too deal with unforeseen business expenses and/or work order shortages. Simply put, it’s a great solution to remedy issues that involve liquidity and cash flow. When you apply for a business line of credit, cash flow shortages will be a concern from the past.
It’s easy to understand the concept of a business line of credit, especially if you’ve used a credit card before. Once you’re approved, you can withdraw money, pay it off, and withdraw again whenever you need additional working capital.
If you like more details about acquiring a business line of credit for your company, the experts at SMB Compass can help you.
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