Business Line of Credit and How it Works

I wanted to write this to give you guys a quick guide on a business line of credit works and how it works and what it is. That way you can have a base of knowledge to work off of. This can get a little complicated for beginners and will look to simplify this process for you to understand. Because understanding how a line of credit works can help get your business in the right direction simple.

In order to take advantage of all of this let’s start by defining what a Business Line of Credit is.

What is a Business Line of Credit?

A business line of credit provides a business with access to money that can be used to address any business expense that arises. This isn’t necessarily a loan, because it offers you a continuous pool of money to dip into rather than a one lump sum amount.

There are two types of business lines of credit. You have secured and unsecured. The biggest difference between the two is a secured is guaranteed by collateral (like a home) while an unsecured line of credit is not. Because of that an unsecured line of credit usually has a higher interest rate. Obviously, because there’s no collateral.

Each lender usually has different qualifications to get a line of credit. One of the main things each lender looks for is multiple years under the same ownership. Additionally, they may also look at the revenue for the past few years. Most banks (like Bank of America) usually require between $50K-$250K in revenue per year. The exact number depends on the lender or financial institution.

Difference between a Line of Credit and a Business Loan

Now that we have defined what a business line of credit is let’s discuss how it differs from a business loan. As I mentioned earlier a line of credit is a money source you have ongoing access to. While a loan is a one-time lump sum amount. You still have to pay interest on both, but the interest on a line of credit is usually lower.

Having a business line of credit is good for keeping up with ongoing expenses. Like payroll, operating expenses, getting supplies, and increasing inventory. Sure you can utilize a loan for the same amount but the interest rates are usually higher and you only get it in one lump sum.

Difference between a Line of Credit and a Credit Card

The difference between these two is a little bit vague. I get the confusion when people think about the two. With a line of credit, you can access all or part of the loan at any given time. You can repay the loan and use it again and you only pay interest on the amount you used. Whereas, with a credit card there are items you can not pay for. For instance, you can’t pay your employees with a credit card. But with a line of credit you can, because it is given to you in the form of cash.

Takeaways

This article wasn’t meant to make you an expert on the concept of a Business Line of Credit. But it should give you a baseline for how it works. If you are looking for a good resource, here is a link to Bank of America’s line of credit section. I prefer Bank of America for all of my business needs, but the bank doesn’t really matter as much, it’s all about relationships. Pick the one that fits your style and business. So, hopefully, this answers the question of what a business line of credit is and how it works.

This is a rough outline of what you are going to need to get that line of credit. This is just the start of your wealth journey.