What is a Business Line of Credit?

By Ram - Apr 12 2024

Every business, no matter how successful, needs a reliable source of funds. With the constantly changing market dynamics, you never know when you need funds to expand or complete a new order.

A business line of credit is one of the funding sources businesses can consider. It offers a flexible source of capital that you don’t get with other business loans. A business line of credit is not a commonly used funding method among businesses mainly because not many of them understand how it works. Instead, they prefer conventional loans, regardless of the benefits they offer.

Here is a closer look at a business line of credit, how it works, its benefits and whether it is the right funding option for your business.

What is a Business Line of Credit?

A business line of credit is a form of revolving credit available to businesses that allow you to withdraw money as needed instead of a typical loan paid in a lump sum. Entrepreneurs can get funds quickly and inexpensively using the business line of credit. You can access a certain amount of money and only pay interest on what you use.

Line of credit can be best for managing cash flow and other ongoing expenses in the business. The business line of credit has a predetermined limit. Typically, the business line of credit has a draw period that lasts between one to five years or longer for some providers. Once the draw period ends, you enter the repayment period, in which you pay back both the principal and interest.

Business lines of credit can be secured or unsecured. The options that don’t require any collateral have lower credit limits. A business line of credit is similar to a business credit card or personal line of credit but for business owners to tap into when they need the cash.

Benefits of a Business Line of Credit

When looking for business funding methods, there are different types of loans you can look into. However, a business line of credit has unique benefits that make it more appealing in the right situations. Some of these benefits include:

Easy and Flexible

Unlike traditional loans, which provide a lump sum, a line of credit allows you to access the funds you need at a specific moment. You control how much money you take and when you get it, and you will only pay interest on the amount used.

The funds in your line of credit are unlimited. You can use them in whatever way and whenever you need them.

This funding method allows you to put the money when and where it is needed most. Other business loans require you to specify where you’ll use the money. With a line of credit, you can use the money for whatever purpose without being as strict.

With this option’s flexibility, you can implement business strategies without worrying about cash flow because a line of credit gives you immediate funding.

Revolving Credit

A business line of credit is also called revolving credit. You can tap into it repeatedly if you diligently pay the repayments.

The lender will offer you some capital for an unspecified period. As you complete your repayment, you will have access to the funds again. The ability to continually obtain funds is crucial to the growth of the business. It allows you to make growth-based decisions and convert the capital you get from the line of credit into income-generating opportunities.

Be in Control of Your Business

A business line of credit helps you stay on top of everything. You don’t have to cede control of the business to investors because the line of credit offers you the capital you need.

Lower Interest Rates

Most lines of credit follow a prime lending rate, which means the interest on the funding doesn’t fluctuate over time. Thus, the interest rates charged are more predictable and lower than those charged on a traditional loan. If you always pay on time, the interest rates will stay low.

How a Business Line of Credit Works

Small business lenders may have different business lines of credit structures that vary slightly. But generally, there’s a draw period and a repayment period.

The draw period lasts up to five years. During this period, you can borrow money from the line of credit up to the predetermined limit. The money you borrow during this period accumulates interest. If you don’t borrow money, you won’t pay any interest. You may still need to pay a fee to keep the credit line open, but this varies by lender.

After the draw period, there’s the repayment period, which starts after the draw period ends. During this period, you cannot borrow any more money on this line of credit. You’ll repay the loan in instalments, like a business loan, until you’ve repaid the borrowed amount in full.

Business Line of Credit Requirements in Australia

Most financial institutions offering a business line of credit facilities require that you have the following before being approved for funding:

  • Substantial revenue during the years you’re in business
  • Have at least a few years of business history to qualify
  • Larger lines of credit may require collateral (personal, business or real estate)
  • Personal and business tax returns
  • Bank account information
  • Business financial statements such as the balance sheet and profit and loss statements

Most lenders require that your business should be running for at least 6 to 18 months and have at least $25,000 in annual revenue to qualify for a line. The exact requirements vary by lender, so you should confirm before applying for the line of credit.

Closing Remarks

Securing a business line of credit comes with many benefits. But just like other types of loans, you need to manage this source of funds wisely. As long as you use the capital strategically, it can help fund your short-term business needs and grow your venture without much of a problem.

 

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