The most commonly cited factor for a small business failing is a lack of access to the capital funds needed to keep the business moving forward. There are many different kinds of small business funding options available today.
Business lines of credit are a popular choice, and for good reason. They have many benefits over traditional lump-sum up-front small business loans, and are ideal for certain use cases, industries, and business models.
As a small business owner, it’s important to understand the different loan and credit options available to you, and to take full advantage of the right kinds of small business funding instruments to maximize your chances for success.
What is a Business Line of Credit?
In this guide, we’ll dig into the details on business lines of credit, exploring how they work, how they differ from credit cards (which work on similar principles), and look at the ideal uses for a business line of credit.
Finally, we’ll answer some of the most frequently asked questions about business lines of credit and how they work.
This should help you, as a small business owner, to choose the best small business funding option for your business, and better know when to request a business line of credit for your business needs.
It’s instructive to start by explaining what exactly a business line of credit is, and how it works. In the simplest terms, a business line of credit provides you with a facility to borrow against, up to the credit line amount.
You don’t receive funds up-front when you open the line of credit, as you would with a small business loan. Instead, on a revolving basis, you can choose how much you need to draw from the line of credit.
Then, you pay interest on the outstanding balance only, not the total line of credit amount. You repay the outstanding balance, plus interest, over a set period of time or with minimum payments like a credit card.
In the meantime, you can borrow additional funds, provided your outstanding balance remains below the maximum on the line of credit. You can continue repaying and borrowing against the line of credit as often as you wish, for whatever your business needs may be.
This can present many benefits over a traditional small business loan or other small business funding products, as we’ll discuss in greater detail in a later section of this guide.
Business lines of credit are somewhat more difficult to qualify for, however, than a small business loan – especially small business loans for bad credit customers.
This is because business lines of credit require more financial discipline by the borrower, and are a higher risk for the lender compared to traditional loans.
Still, for a large portion of small businesses, they are readily attainable, especially when you choose a non-bank, alternative private lender like BizFly Funding as your source. We’ll discuss BizFly Funding in more detail at the end of this guide.
How a Line of Credit Differs from a Credit Card
As we’ve already hinted at, a line of credit works in kind of a similar manner to how a credit card works. With a credit card, you have a credit limit, and can use your card until the balance reaches that limit.
You pay interest on the outstanding balance, and can make purchases again on the credit remaining between your limit and your current balance. You repay the balance, plus interest, and can draw against it again. This is largely how a business line of credit works too.
There are some key differences however, the first being that credit cards are used as a form of payment for purchases, whereas the funds from a business line of credit provide cash, usually as an electronic transfer or check.
Business lines of credit also tend to be much larger than typical consumer or business credit card accounts, with upper limits on the order of $250,000 or more. The repayment typically is more structured, or has much higher minimums than a credit card as well.
Finally, the interest rates on business lines of credit tend to be much lower than on commercial credit cards, typically half or less than the average credit card balance interest rate. However, it’s still useful to compare a business line of credit to a credit card.
They are not analogous or a binary choice when it comes to small business funding.
Rather, the credit card example is something with which most people are familiar, and it fairly well illustrates the concept of a business line of credit, just differing in the details as discussed above.
Some lines of credit even can come with credit cards associated with them – you’ll have to check with your lender and business line of credit terms if that’s an option you’d find beneficial for your business.
Deciding Between a Business Line of Credit and Other Small Business Funding Options
Based on the nature of how a business line of credit works, there are some ideal use cases for it in the world of small business funding.
Of course, you can generally choose whatever small business funding instruments you qualify for, and use them how you see fit (subject to any terms in the agreement for that loan or credit product).
But given interest rates, the length of time a loan or credit line may require for repayment, and other details, there are some pretty clear cases where a business line of credit is your best option.
Specifically:
- Managing cash flow and variable expenses, since you only pay interest on the outstanding balance, and have a good deal of flexibility in how much money you borrow, how much you repay, and the timing on those transactions.
- Inventory purchasing or purchase order financing, which can be on the order of a few months to a few quarters to go from purchase to receivable for a finished good.
- Paying for seasonal or variable labor costs, especially if your business is seasonal or cyclical in nature, and you have to ramp up with temporary staff periodically.
- Providing a facility to manage revolving operational payments, to deal with uneven revenue, and smooth out the peaks and valleys between revenue and expenses.
- As a buffer or safety net to handle unexpected bills and surprise expenses like equipment repairs, freight expediting, and so on.
Business Lines of Credit from BizFly Funding
If you’re looking to learn more about business lines of credit, or other small business funding options, you should check out BizFly Funding. BizFly Funding is one of the premiere private, non-bank lenders operating today.
They focus entirely on providing small business funding, with exceptional customer service, an easy-to-use online application, fast approvals, and fast funding – many loans and credit lines provide funding in as little as 1 business day.
To learn more about all your small business funding options, check out the BizFly Funding website at https://bizflyfunding.com
Frequently Asked Questions about Business Lines of Credit
While you may be able to technically use a business line of credit for personal expenses from a functional standpoint, the legal and tax implications are cause for concern.
Most financial experts advise you always keep your personal and business expenses and funding sources separate.
It may be a violation of business laws, accounting standards, and other statutes depending on your particular jurisdiction as well.
It can mess with your deductions on interest, personal and/or business tax benefits, and is generally a bad idea.
If you don’t require a large, lump sum of money immediately, but want the flexibility to borrow significant amounts as needed, then a business line of credit is a great choice.
On the flipside, if you need a large sum now, with regular payments over a fixed period of time, then a small business loan might be the better option.
The good news is when you choose a good private lender like BizFly Funding, there are a range of small business funding products for you to choose from, with ideal uses and different benefits and drawbacks, so that you’re able to find the ideal funding options to suit your particular business situation and needs.
Opening a business line of credit, or drawing against it, does not necessarily have an impact on your credit score directly.
However, any open credit or loan accounts, and the amount you have borrowed against those account maximums, can have an impact on your credit score.
It’s generally good practice not to borrow against more than 50% of your business line of credit maximum, or your credit score may be affected.
On the flipside, having a business line of credit, and routinely making required payments to pay off outstanding balances, will generally have a positive impact on your credit score.
A line of credit is one of the harder small business funding options to qualify for, as we mentioned in our guide above.
At BizFly Funding, it requires at least 6 months in business at the time of application, monthly revenues of at least $10,000, with higher requirements for larger lines of credit, and a minimum credit score of 650.
Compare this against the small business loan requirements, for example, which are the same except for minimum credit score, which is 500, and you’ll see that it’s not as easy to qualify for a line of credit with bad credit.
Please see our guide above, as we cover in detail exactly how a business line of credit works.
