When you get a business line of credit, your lender will commit to a specified maximum amount of funds from which you are permitted to draw on as needed. Unlike a business loan, you apply for a business line of credit before you need it.
With lines of credit, you only make payments and owe interest if you borrow money.
With a business line of credit, if your balance is zero, your payment is zero. In addition, you pay interest only on an outstanding balance.
Sometimes a small business loan is more appropriate than a business line of credit.
Whether you should apply for a business line of credit or a small business loan depends on what you intend to use the funds for and how long you want the terms of repayment. The following table compares the recommended uses and features of a business line of credit versus a commercial loan.
Your ability to get a business line of credit will depend on several factors.
Getting a business line of credit is much easier if your company has a long and established track record of earnings and expenses. Lenders will sometimes grant an unsecured line of credit if your business can demonstrate consistent earnings, an excellent capital position, and multiple sources of repayment.
If your business is new, lenders will usually not issue a line of credit without the owner’s personal guarantee of repayment. If there is insufficient business collateral to serve as a secondary source of repayment, the bank will often require that personal collateral be used to secure the loan.
In summary, business lines of credit should be limited for short-term funding needs.
Most lending experts recommend that you primarily use lines of credit for things that will generate extra revenue in the short-term. When you do this, you can justify the extra debt that you just incurred.
The following are a list of lenders that offer business lines of credit: