What’s a Business Credit Line? Great Question! Let’s Find Out
A business credit line is a great tool for small business owners to smooth over cash flow issues within their company and deal with the gaps between expenses and revenues. If you haven’t dealt with a business credit line before, you might assume that its the same as a business credit card–but there are important differences. And as a business credit line can be very helpful to your business, you should read on to learn more about business credit lines work.
A business credit line can give you quick access to cash for your business when you need it. Also known as a revolving line of credit, a business credit line works as follows:
- You, as the business owner, note that you have financial stress when bills are due and you have not yet received payment for previous services. You calculate that having a financial cushion of some amount (for our example, let us assume $20,000) would smooth over these issues.
- You go to your local bank or financial institution and ask to open a business credit line up to $20,000. The bank grants you the requested credit line.
- When bills come due, you draw out funds on the credit line. Let us assume that you had $5,000 in bills come due. You pull $5,000 out of this business credit line and use it to pay bills.
- You will then need to pay back the $5,000 principal amount you borrowed plus applicable interest, but interest is only charged on the $5,000, not the full $20,000 that you have access to.
- If needed, you can make additional draws up to the $20,000, but you only pay interest on what you are borrowing at any given time.
This is a powerful financial tool, and differs from a credit card in a few ways. Credit cards typically have higher interest rates and charge additional fees for cash advances. In addition, credit cards typically require payments on a monthly basis, whereas a business credit line typically does not require monthly payments. This is important for a business owner who might work on cycles longer than a month. For an example, consider a homebuilder. A homebuilder will spend several months building a home and accruing expenses for the materials and services required. During this time, they can draw on their business credit line to fund the expenses. After the home is complete and sold, they can repay the full amount of the credit line with interest, but interest will only accrue on the amount they borrow at any given time.
A credit line can also come in handy in times of unforeseen expenses, so you can think of it like an insurance policy available to you when you need it. You will need to have the credit line in place, however, prior to needing the funding–as there is an application process and approval period entailed. Therefore, it’s actually prudent to seek out credit lines before you need them.
Regardless of your business, a business credit line is a powerful tool that can help you accessing funding when you need it. As it costs nothing to have in place (only when you draw funds), it’s a smart investment in your time to seek out putting one in place.
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