Business Line of Credit
A business line of credit can be an important financial tool to help business owners approach financing in a strategic and attentive manner. Having access to a credit line and taking advantage of its opportunities, or meeting other short-term capital needs can be a big boost in helping you build a flourishing business.
A business line of credit permits business owners to acquire borrowed capital they may need some time in the future. Numerous businesses utilize a line of credit as part of a bigger capital access approach, including short-term and longer-term financing to fuel business development, and to fund other income-generating ventures.
What is a Business Line of Credit
A business line of credit 
(LOC) is a revolving loan that permits access to a fixed amount of capital, which can be utilized when needed to meet short-term business needs.
A LOC is one of the tools a business can use to fund short-term working capital requirements.
Examples of this include:
- Buying inventory
- Repairing equipment essential to business
- Financing a marketing campaign
- Making up for a seasonal cash flow gap
A business line of credit shares more similarities with a business credit card than with a business loan.
A small business line of credit is liable to credit review and annual renewal, and is revolving, similar to a credit card.
Interest starts to collect once you draw reserves, and the amount you pay (with the exception of intrigue) is again accessible to be acquired as you pay down your parity. In contrast to a credit card, the loan specialist will set a breaking point on the sum you may acquire.
Types of Business Line of Credit
1. Secured Business Line of Credit
This kind of LOC requires the business to promise specific assets as collateral to secure the line. Since a line of credit is a short-term obligation, lenders commonly request for short-term assets, like accounts receivables and inventory.
Lenders don’t often require capital resources (like real property or equipment) to secure a LOC. On the off chance that the borrower can’t repay the line, the lender will assume the ownership of any collateral and liquidate it to pay off the remaining balance.
2. Unsecured Business Line of Credit
This kind of LOC doesn’t require specific assets as collateral. But, a general lien and personal guarantee will probably be required.
Since there is no specified collateral to guarantee this credit line, the business will probably require a stronger credit profile, as well as a positive business track record to qualify. Moreover, interest rates might be somewhat higher; and unsecured credit lines are often smaller in amount.
How does a Business Line of Credit Work
When opening a business line of credit, the business gets access to a stated amount of funds to use as needed.
A monthly statement mirroring the amount of credit utilized will likewise include any interest charges (not at all like a term loan, where you just pay interest for the funds you use as you use them).
As mentioned previously, your payment, and the interest, depends on the funds you use. Once repaid, the credit limit is accessible once more, when needed.
The period payment schedule to repay a line of credit will fluctuate depending on the lender. It will be either a weekly or monthly periodic payment schedule (which are most common).
Notwithstanding the interest charges, an annual fee for a LOC isn’t unheard of. On the off chance that your business oftentimes accesses the LOC, transaction fees may likewise apply.
Small LOCs (under $100,000) can work like a credit card account, with advancements made by utilizing a credit card attached to the line of credit or by composing checks issued for the account.
A few loan lenders additionally offer the choice of depositing funds directly into the business bank account by means of an ACH deposit.
Why Apply for a Business Line of Credit
The main reason to apply for a business line of credit is to access short-term financing. Most businesses utilize this source of funding to finance operational costs like supplies or payroll, or for increasing inventory. Cyclical businesses often depend on an unsecured line of credit as a source of off-season working capital.
Unlike other small business loans, an unsecured line of credit isn’t assigned to a particular purpose or purchase. It’s an appropriate choice for small businesses searching for approaches to managing better cash flow. Funds are normally drawn from the line of credit by utilizing a business checking account, a business credit card or even a Mobile Banking application.
To add, if a business regularly needs access to funds to meet short-term capital needs to deal with the business’ everyday capital necessities, applying for a LOC may bode well.
How to Apply for a Business Line of Credit
Like a term loan, most banks will need to see financial records and reports that exhibit a reputation and show creditworthiness.
Conventional lenders, like banks and credit unions, will require some extra documentation that online lenders probably won’t. So, the smart thing would be to research about the documents and requirements needed for application before your first meeting with a lender.
Examples of these requirements could include:
- Business License
- Tax Returns
- 2-3 months of bank statements
- A business bank account
- Standard financial documents like P&L, AR, AP, Cash Flow, etc.
You ought to be prepared to talk about the specifics of the business’ financial situation with the lender, so any documents you might be unfamiliar with, should be discussed with a trusted advisor, like an accountant or CPA to ensure you understand precisely what the documents show when regards to the financial health of your business.
Generally, lenders will only rarely offer a LOC to:
- Idea stage companies or startups
- Cover losses on past operations
- Meet immediate expenses that won’t necessarily lead to profits
To prove that the business is qualified for a LOC, show:
- That the business is profitable, and capable in generating additional revenues
- That management understands the financial aspects of running a business
- That the business has a plan for the LOC to cover specific expenses at particular situations, and can fully exhibit an ability to make periodic payments