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A credit line, also known as “line of credit” (LOC) is an open-ended type of loan that allows a client to borrow and repay money.

Most small business owners struggle with reliable cash flow for their companies. Due to the inconsistent or seasonal nature of their business, they may experience long, stagnant periods of sales slowdown, or fluctuation in their equipment and inventory prices. Therefore, they will need liquid cash on hand to deal with these unexpected challenges and to avoid worse case scenarios, such as declaring bankruptcy. This is when a business credit line comes into play.

A business line of credit is similar to a credit card. It is a flexible loan that gives the borrower access to a fixed amount of capital on a revolving basis, which can be used to meet short-term business needs. A line of credit works on what is called “a revolving basis”, meaning that once the business pays back the money it borrowed, the line of credit will replenish again, and the user can borrow up to the same amount again without going through another approval process. This is an efficient route for business owners who do not want to apply for multiple loans repeatedly. Non-revolving lines of credit, like student loans, are different from revolving credits because they can’t be used again after they are paid off.

Most small businesses open a credit line to gain access to short-time funding. These funds are used by these companies to support financing for operational expenses like supplies and payroll or for increasing inventory; to cover gaps in cash flows.

A few advantages that come with choosing a credit line for your business over other traditional forms of financing include:

  • Affordability: with a credit line, you only pay interest on the amount that you use, and it typically has a lower interest rate than short-term loans of similar size. Also, depending on your terms and conditions from your lender, you may be allowed to pay off the balance at any time without a prepayment fee.
  • Flexibility: a line of credit offers immediate, rotating access to cash and can be utilized as needed.

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