Just like most start-up companies and early entrepreneurs, I always seemed to have no clue about how a business line of credit actually works. And after doing some digging, I found that it’s not that complicated once you understand the fundamentals of how a business line of credit actually works. In this article ill be going over some of the fundamentals I’ve found online by some of the top sources and lenders and how these loan products work.
What Are Business Lines Of Credit?
Business lines of credit are very similar to a traditional credit card, you can borrow up to a certain limit and you pay only interest on the amount you’ve borrowed. And just like a credit card, you have the option to pay off the full amount every month or pay the minimum, and any balance you owe will accrue interest.
These lines of credit were originally designed to help businesses for short-term financial needs. Many businesses use lines of credit to either buy extra inventory or pay seasonal employees during a holiday season. Another reason why business owners request business lines of credit to use for an emergency, let’s say you don’t really need the funds at the time but if an actual emergency arises you can quickly access the capital. And you only repay what you borrow, so if you don’t withdraw any capital then there’s nothing to repay.
Business Line Of Credit
Business lines of credit are virtually available from banks and other direct lenders, at SourcifyLending we’ve implemented a process to simplify the shopping experience when obtaining a line of credit. When looking at a business line of credit they are much smaller than loans, the max on lines of credit is about $250k. And unfortunately, many lenders don’t want to make small loans therefore if you need $250k or less then a business line of credit is your best option.
How Are Business Lines Of Credit & Business Loans Different?
The one thing that both business loans and lines of credit have in common is that both can provide your business the working capital it needs, but they work differently and this is why.
- A business line of credit has a revolving line of credit which allows you to carry a balance that accrues interest. If you don’t utilize the business line of credit then you don’t have to make any payments. But if you were to withdraw from the line of credit, as long as you can make your minimum monthly payments you can pay what you can afford or pay off the balance in full.
- Now a business loan is different, a business loan is an installment credit. So how it works is, you’ll receive a lump sum and pay it off with fixed monthly payments. Also, you must start paying it back right away, and you must pay it back even if you do not use the money immediately.
- Compared to traditional personal loans, business loans have more limitations. For instance, you can’t use the capital of an equipment loan for payroll. But with a business line of credit, you can use it for all and any business purpose of your choice.