A business line of credit offers new businesses with more flexibility compared to 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 option for managing cash flow, buying equipment and paying for miscellaneous expenses.

How It Works

Whereas term loans provide your business 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 to $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.

Here are other ways a business line of credit can be put to use:

  • 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 pay for unforeseen business expenses and/or work shortages. Simply put, it’s a great solution to remedy issues with liquidity and cash flow. When you apply for a business line of credit, you won’t have to worry about cash flow shortages.

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 want to know more about a business line of credit for new business, SMB Compass is happy to help! Feel free to call us via phone call us at (646) 569-9496 or email us at info@smbcompass.com. We’d love to hear from you!