What is a Business Line of Credit and how is it different from other business loan types?
A business line of credit can be seen as a cross between a business loan and a business credit card. Like a business loan, an unsecured line of credit provides business financing that can be used for general business expenses. However, with a line of credit, there is no lump-sum disbursement, a business owner borrows only what is needed and only pays interest on the amounts borrowed.
Like a credit card, the amount of capital available to draw down and the payments are revolving and is usually subject to annual review. Interest begins to accrue only when money is drawn (or borrowed) and interest only applies to those amounts. The lender will set a limit on the amount the business may borrow.
Using A Business Line of Credit
A business line of credit is very flexible in comparison to other loan types. In most cases you will not be asked to specify a particular use for your loan.
That flexibility allows companies to use a business line of credit almost as a safety net or insurance policy against gaps in cash-flow or seasonal lulls in business. Some companies use a line of credit to help increase capacity in times of unexpected spikes in demand.
A business line of credit is ready cash and it is flexible and there is no cost to maintain it. Therefore, it is a solid business practice to open and maintain a business line of credit.