10/27/18

How Does a Business Line of Credit Work?

In the world of financing, there are ultra-specific options and there are more flexible solutions. Equipment financing is fairly dialed, for example, with little ambiguity regarding what it should be used for.

A business line of credit, on the other hand, is incredibly flexible. You can use it for a wide range of business needs, including hiring staff, expanding to a new location, paying invoices, or boosting your inventory. And, if the urge hits, you can even use it to buy new equipment.

Another aspect that makes a line of credit so flexible is that it’s revolving. You get approved for a certain amount of money, and you can access it as many times as you need to. Once you’ve repaid what you used, the funds are available for you to use again.

For this reason, many people consider a line of credit as a safety net. When things are going smoothly and you don’t need it, there’s no obligation to use it. In the situations where it becomes necessary, however, you can utilize the funds for just about anything. You’ll only pay interest on the amount you used, not the full amount you’ve been approved for.

According to a report from USA Today, a line of credit can help small businesses navigate the ebbs and flows of a calendar year.

“If your business has a low season and a high season, you may consider spending on credit during the low season to push through to the high season,” states the article. “If it takes some time to collect payments from customers after sending out invoices, a line of credit can help you cover any gaps.”

Obtaining a business line of credit isn’t particularly difficult. To be approved, your business will need to have been operating for at least six months and be pulling in at least $50,000 in annual revenue. Lenders will also look at your credit score, but you should be in great shape as long at your score is 560 or higher.

In some cases, a lender could ask for a personal guarantee. This means you put forth assets like a house, car, or bank account. If you consistently pay off the funds you use from the line of credit, those assets stay safely in your keeping. If you were to default on your obligations, however, the lender could then take possession of them.

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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