If you’re a small business owner, you know how important cash flow is for the health and growth of your business. But what do you do when you’re faced with unexpected expenses or late-paying clients? A business line of credit (LOC) might just be the solution you need to keep your business running smoothly.
What is a Business Line of Credit?
A business line of credit is a flexible form of financing that allows you to access funds on an as-needed basis. Similar to a credit card, you’ll have a credit limit, but you’ll only be charged interest on the funds you actually use. This means you can draw funds when you need them, and pay them back as you go. It’s a great option for businesses that need short-term financing to cover expenses like payroll, inventory, or unexpected repairs.
How Does a Business Line of Credit Work?
When you open a business LOC, you’ll be given a credit limit. You can draw funds from the LOC as needed, up to that limit. For example, if you have a $50,000 LOC and you need to pay $10,000 for inventory, you can draw that amount and pay interest on the $10,000. If you pay back $5,000, you’ll have $45,000 left to use. You’ll only pay interest on the funds you’ve drawn, not on the full credit limit.
Business Line of Credit vs. Business Credit Card
While both a business LOC and a business credit card are forms of revolving credit, there are some important differences to consider. Business credit cards generally have lower credit limits and higher interest rates than business LOCs. They’re better suited for day-to-day expenses like office supplies or small purchases. Business LOCs are better suited for larger, short-term cash flow needs like payroll or unexpected expenses.
Why Choose a Business Line of Credit over a Term Loan?
Unlike a term loan, which provides you with a lump sum up front that you’ll pay back over a set period of time, a business LOC gives you continual access to funds. You can draw funds as you need them and pay them back as you go. This means you won’t have to reapply for a loan every time you need additional funds. Additionally, a business LOC generally has a lower APR than a term loan of the same amount.
Uses for a Business Line of Credit
A business LOC can be used for a variety of short-term financing needs, including:
- Payroll: If you need to cover payroll while waiting for clients to pay invoices, a business LOC can help.
- Inventory: Take advantage of sales or purchase inventory to meet demand without tying up all your cash.
- Repairs: Unexpected repairs can be costly, but a business LOC can help cover the expense.
- Growth: Whether you’re expanding your business or investing in new equipment, a business LOC can provide the funds you need to make it happen.
In conclusion, a business line of credit is a flexible and convenient way to access short-term financing when your business needs it most. With the ability to draw funds as needed and pay them back over time, a business LOC can help keep your business running smoothly and growing.