Simply speaking, a business line of credit works like your credit card. The bank or the lender gives you access to a specific amount of money defined by the credit limit. You can then keep on repaying or reusing the finance as often as you like, as long as you make payments in due time and avoid exceeding your limit. A business credit line can come secured, requiring collateral, and unsecured when credit limits are lower.

Line of credit facilitators makes it a point to review a company’s financial history before approving. Some may also require substantial proof of revenue. Collateral is sometimes required if your business needs an extensive line of credit.

A business line of credit is a revolving line that is mostly used as a short term working capital that helps finance your unexpected expenses.

Is a business line of credit different from a traditional term loan?

Business lines of credit come at lower interest rates and closing costs than a traditional term loan of a similar size. Also, traditional term loans have regular interest rates over a loan’s life — one of the biggest differences between a business line of credit and a term loan.

In essence, a term loan is better when you’re making business investments or specific purchases. On the other hand, a business credit line works better if you’re running into cash flow issues. But that doesn’t mean you can’t make use of lines of credit for investments, too.

A business line of credit has several features that make it ideal for some business owners as a source of funds. Important benefits you can have by availing a line of credit include:

• Only pay for what you use: pay interest on the amount that you use.
• Steady cash flow during slow seasons: the ideal tool for evening out cash flow during slow income days.
• Building business credit: builds a business credit history.
• Better business adaptability: take advantage of opportunities even with a limited window.

As mentioned before, a business line of credit is used the same way as a family’s credit card would be; for unexpected expenses and in cases of emergency.

You should consider a business credit line as a/an:

• Short-term working capital
• Safety against unexpected costs
• Way of availing unique purchasing opportunities
• Way to offer trade credit to customers

Let’s imagine a scenario where you’re waiting to receive payment from your customers. So, you calculate that having the financial support of, let’s say $30,000, would keep this from happening in the future.

So, you resolve to reach out to a professional business line of the credit provider to borrow $30,000.

You owe $3,000, so you pull that exact amount out of your line of credit.

Remember that even though you have $30,000 in business credit lines, you only need to pay back $3,000 that you took, plus any interest rates. Also, these interest rates only come out of the $3,000 that you borrowed, and not the full $30,000 you can freely access.

For instance, your interest rate is 7%, you’ll only have to pay back $3,210 (that’s the $3,000 plus the $210 in interest).

And after you pay that off, you can continue drawing more money as you need, up to the $30,000 maximum amount.

A business line of credit is advisable for a business that needs fast access to cash. They also tend to be ideal for loaning credit line amounts of $10,000 to $100,000. As long as you don’t exceed the limit, you’ll be fine.

Just be mindful enough to sort through your options thoroughly before determining that a line of credit is the right financing option for you.