Blog

What Is A Business Line Of Credit And How Does It Work?

Dec 10, 2021 | Finance, News and Updates

A business Line of Credit (LOC) is a valuable tool for businesses to fill short-term funding needs. It can help you get the cash you need even if you don’t have collateral or other assets that lenders typically require. A business LOC is a renewable option and a revolving loan that is typically offered as unsecured debt that lets you draw on your available credit limit as needed for short-term financing, like paying bills, buying inventory, meeting payroll obligations, or making any other type of payment. The amount you pay is again available to be borrowed as you pay down your balance. Unlike many business loans, a business LOC is not designated for a specific purpose or purchase. It is a good choice for businesses looking for ways to approach financing in a strategic and thoughtful way. Funds from the LOC are drawn by using a business account, business credit card, or even a mobile banking app.

  • A business that generates most of its sales in the summer could use an LOC in the offseason to help them maintain normal business as it bridged from one season to the next.
  • A business could use an LOC to finance a marketing campaign to attract new customers and expand sales. The campaign could potentially generate additional revenue, so the borrowed funds could be paid off quickly.
  • A business could use an LOC to cover expenses while waiting for a client to make payments on an invoice.

Example:

You have a line of credit of $50,000, you withdraw $10,000 to pay bills on your business. You will only pay the interest rate on the $10,000, and you can still borrow the remaining $40,000 if needed. You then need another $5,000 to buy inventory. You will be able to withdraw that before you have paid back the $10,000. The interest is charged only on the amount you have borrowed.

Business Term Loan vs. Business Line of Credit vs. Business Credit Card

Business Line of Credit

  • Lenders look at a business’ credit performance to decide the creditworthiness of the business
  • Fundamentally a credit limit a business can borrow against whenever they need it, repay, and use it again
  • Lenders require the LOC balance to be brought to 0 during the term of the credit line
  • Ideal for short-term (i.e. purchasing inventory, repairing equipment, covering day-to-day expenses)

Business Term Loan

  • Lenders  evaluate your creditworthiness by looking at a business’ credit profile
  • Fixed amount of funds which will be received in a lump sum
  • Periodic payments are repaid over a defined period of time, in a prearranged schedule of payments until the balance is paid in full
  • You can get a larger amount, more suited to major, high-cost purchases (i.e. buildings)

Business Credit Card

  • Gives you a revolving line of credit that you access with a physical card
  • If your credit scores are low, you will be asked to provide collateral (i.e. savings account)
  • Best for expenses that you don’t need cash to pay for
  • Lenders charge you a higher interest rate than LOC

A line of credit shouldn’t be used as a cover for losses. You are more likely to get approved for a line of credit when the business is good and the cash flow is healthy. The lender will see your financials like bank statements, balance sheets, and income statements. They will also see your business credit history, and sometimes your personal one. Some lenders will not approve you of an LOC unless your business has been earning for a few years.

Recent Blogs

Navigating the Australian Property Market as a New Investor

Navigating the Australian Property Market as a New Investor

I’ve had the pleasure of assisting many clients in taking their first steps into property investment. One common concern I often come across is the challenge of saving up for a deposit. The good news is there are alternative paths, especially if you’ve been a property owner for some time. The equity in your existing property can serve as a valuable resource for your initial investment, potentially allowing you to enter the market without using your savings.

read more