What Is a Small Business Line of Credit?

A business line of credit is similar in many ways to a business credit card or home equity line of credit (HELOC).

Like a credit card or HELOC, business lines of credit can be secured or unsecured, and doesn't have a set repayment schedule or term. Instead, a business can tap its line when funds are needed and repay its line when funds are available, though monthly minimum payments typically are required.

A business credit card is actually like a small business credit line. It's easier to get a credit card than a credit line, but a credit line typically has a higher limit than a credit card, making the credit line more appropriate for business purposes.

A small business line of credit can be used to manage cash flow, purchase inventory, materials, or supplies, or accomplish other short-term business objectives. Business credit lines are also useful for businesses affected by seasonality.

Secured vs Unsecured Business Line of Credit

While a HELOC is secured by the borrower's residence, a business credit line may be secured or unsecured. A secured business line of credit is backed by an asset (such as a piece of property) as collateral, and typically comes with a higher credit line and lower interest rates. An unsecured business line of credit is not backed by any collateral, and can be much more difficult to get. An amount less than $100,000 is more likely to be unsecured, but larger amounts may be secured by assets or a certificate of deposit (CD).

Pros and Cons of a Business Line of Credit

A business line of credit is flexible and allows business owners to control how much they borrow and when. A credit line also can be easier to get than other types of business loans and is often is the easiest way to have funds available as needed.

Credit line interest rates are based on the bank's prime rate, plus a premium. No interest is owed until at least some of the money is borrowed, so a business can set up a credit line just in case without incurring any interest expense. An setup fee may be charged to open the credit line, and an annual fee may be charged to keep it available.

Still, a business credit line is a form of debt and should not be undertaken without a firm understanding of the business's opportunities and ability to repay any borrowed sums.

Borrowing money might not be wise for a company that's struggling, unprofitable, or poorly managed. If the business fails, the owner could be personally responsible for repaying the business debt, making matters worse for him or her rather than better.

Businesses that need larger sums of money for longer terms to buy real estate or equipment, add employees, introduce new products, or make other major investments in their operations might be better served with a small business loan instead of a credit line.

Getting a Business Credit Line

Both start-up and established businesses can use a credit line, though it will be much easier for an established business to qualify.

Most national and regional banks and many larger credit unions offer business credit lines.

Whether a business can get a credit line depends on its creditworthiness and its owner's personal credit history and score.

Rates and terms for business credit lines vary, so business owners should shop around, ask questions, and compare offers from multiple lenders before they select a business credit line that meets their needs.

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