What is a Business Line of Credit?
A business line of credit is a type of loan that gives businesses a fixed amount of money that they can use to cover their short-term working capital needs such as making payroll, financing marketing campaigns or purchasing inventory or equipment.
Business lines of credit can be either secured or unsecured. A secured line of credit requires a business to pledge assets as collateral. Since the credit line is a short-term liability, this collateral usually takes the form of accounts receivable or inventory. An unsecured business line of credit doesn’t require collateral, which often makes it a more attractive option for small business owners. Since an unsecured line of credit doesn’t require collateral, a business usually needs better credit and a good business track record for approval.
How a Business Line of Credit Works
When you open a business line of credit, you receive access to a fixed amount of funds that you can use to cover short-term business expenses as needed. You will receive a monthly invoice for the amount of credit you’ve used along with any interest charges. Rates and limits are set by lenders based on your business’s risk grade, collateral, and any other servicing requirements.
Should My Business Get a Line of Credit?
A business line of credit can come in handy if you regularly require funds to cover short-term cash flow issues or if you want to take advantage of an immediate business opportunity. Anything you spend does need to be paid back with interest, so it is not the best option if your business isn’t profitable and you may not have the funds to make payments. It is also wise to periodically pay back everything you owe instead of making a minimum payment. This will help keep your lender at ease and ensure that your line of credit is available when you need it.
To learn more about business lines of credit or to find out if they are right for your business, contact the Smart Capital Lending Group today.