Perhaps the most valuable form of small business funding to have access to is a small business line of credit. These operate somewhat differently from a loan, and are more akin to a credit card – though with several differences.
Learn more about business lines of credit, their advantages, and how they differ from credit cards in our guide below.
What is a Small Business Line of Credit?
A small business line of credit is exactly what its name says – a line of credit for small businesses. But what is a line of credit?
Put simply, it’s an account that allows you to borrow money on-demand, when you need it, and then repay the outstanding balance over time.
With a business line of credit, you don’t get money up-front like with a small business loan. Rather, you get an approved line of credit limit, which is your upper limit for borrowing.
You can borrow against this line of credit in any amount, so long as the total outstanding is below the limit. You can then repay the amount you borrowed over time, and borrow against it again.
Your interest payments are only based on your outstanding balance, and not the entire value of the line of credit. The remaining difference between your business line of credit limit and your outstanding balance remains available to be borrowed against, and repaid.
As you repay the outstanding balance, the available “room to borrow” on the line of credit goes back up.
In some ways, you can consider each time you borrow against a business line of credit as a mini loan of sorts, targeted to exactly the amount of money you need at that time, and with less strict repayment terms.
Often, there are minimum monthly payments (not unlike a credit card) that need to be met, but you can repay the outstanding balance a bit more on your own schedule based on your finances and revenue particulars.
The Benefits of a Business Line of Credit
There are numerous benefits and advantages to having a business line of credit. It works very well on its own, and also serves a valuable role alongside more traditional small business loans and credit cards, among other financing products.
There’s no reason not to consider a small business line of credit – even if you don’t have an immediate need for it this moment – because it can come in very handy for helping you manage your business expenses.
Some of the benefits of a business line of credit include:
- Financial flexibility to borrow money on-demand when you need it, and respond to changing business needs, revenue, and finances.
- You don’t have to pay interest on the whole line of credit, just the outstanding balance, making them more affordable and targeted ways of financing and borrowing than loans and other up-front, lump-sum small business funding options.
- Repayment is typically more flexible and at the discretion of the business (minus required periodic minimum payments) than with fixed-term small business loans.
- You can continuously borrow against and repay the line of credit without going through new loan applications, paperwork, funding, and other administrative processes, making it much easier and quicker to manage your small business finances.
- A business line of credit provides a buffer or safety net for your business to have access to the funds it needs in bad times (economic downturns, emergency repairs, equipment purchases, and so on) and in good times (hiring additional staff, buying inventory, marketing and growth initiatives, etc.).
Business Line of Credit vs. Credit Cards
In many ways, a business line of credit is similar to a credit card account. Both have a credit limit, and allow you to borrow in variable amounts, so long as the total outstanding is less than the limit.
However, credit cards are more designed for directly making merchant purchases. Business lines of credit, on the other hand, provide cash or electronic funds transfers that can then be used as you see fit.
They do not require a merchant who accepts credit cards, and are much more useful for accounts payable/receivable and checking/electronic transfer-type expenses that most businesses encounter in their operations.
At the same time, interest rates on a business line of credit are usually much lower than those of commercially available credit cards. The limits are also usually much higher than on credit cards, even business credit cards.
While you can certainly utilize a credit card account in your business, as part of your overall small business funding plan, they are no substitute for a business line of credit.
Business Lines of Credit from BizFly Funding
To find out more about business lines of credit and other small business funding options, you should visit BizFly Funding’s website at https://bizflyfunding.com.
BizFly Funding is one of the leading private lenders in the US, working exclusively with small businesses to provide the small business loans, lines of credit, merchant cash advances, and other small business funding products they require to operate, grow, and succeed.
They offer competitive rates, easy-to-reach qualifications, a simple and fast online application process, great customer service, and funds available in as little as 1 business day. Consider BizFly Funding as your go-to source for all your small business funding needs!
Frequently Asked Questions about Business Lines of Credit
Whether you have an LLC, sole proprietorship, partnership, or other form of small business, you can usually apply for and receive a business line of credit.
Of course, in order to get that line of credit, you’ll need to make sure you meet the lender’s qualifications.
These are usually spelled out on their website or in the information they provide as part of the business line of credit application. In most cases, a credit score, time in business, and revenue requirement are the main qualifications.
Some lenders may require collateral (a secured line of credit), whereas others – especially non-bank, private lenders – may offer unsecured business lines of credit with no collateral requirements.
Business lines of credit are some of the harder types of small business funding for which you can qualify.
While you will definitely find it easier to obtain a line of credit from a private lender as opposed to a bank or financial institution, it’s still a fairly high-risk credit product for lenders.
This is because you, as the borrower, are in control of the credit line on a revolving basis, which is much riskier than a fixed small business loan or similar loan product.
As a result, the credit score requirements for a business line of credit can often be somewhat higher than small business loans or merchant cash advances, for example.
Still, it all depends on what you consider “bad credit,” and many private lenders offer business lines of credit with minimum credit score thresholds several hundred points below those of banks and institutional lenders.
At BizFly Funding, for example, the minimum credit score requirement for a line of credit is 650 or higher.
A business line of credit can be a very valuable type of small business funding. As you retain control of how much you borrow against the line of credit, you can more precisely calibrate your borrowing against your actual expenses.
This is in contrast to a small business loan, where you have to estimate the amount you need, and receive it all up-front, paying interest on it over time.
Having the facility to draw on significant amounts of money with a line of credit, on demand, provides a great deal of flexibility, cash flow control, and security for many small business owners.
Even if you have no plans to use it immediately, having a small business line of credit as a tool in your financial toolbox can be a lifesaver during economic downturns, unexpected lean times, growth and expansion periods, and more.
In general, business credit and loans should not have any impact on your personal credit score. Small business lines of credit are no different in this regard.
The way they interact and intersect with your personal credit is really only if you are mingling your personal and business finances, which is not recommended by most experts and may have adverse tax consequences.
There’s also a chance that a business line of credit could hurt your personal credit score in the event that it is a secured line of credit, and you have put up a personal asset (vehicle, property, etc.) as collateral against the line of credit.
Every lender maintains different standards or qualifications that borrowers need to meet in order to be eligible for a line of credit (or really any small business funding option).
These can vary significantly, especially between private lenders and banks or financial institutions.
Private lenders typically have lower credit score requirements for all of their small business funding products, including business lines of credit, than those offered from banks and institutional lenders.
At BizFly Funding, the minimum credit score required for a line of credit is 650. You’ll find the other requirements on the lender’s website, and as part of the business line of credit application process.
