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Understanding How a Business Line of Credit Works

Businesses, especially smaller, newer ones, need to be prepared for uneven cash flows, unexpected expenses, and changes in customer buying habits. A business line of credit provides you with safety net for these types of expenses. Get to know how a business line of credit works and how it can work for your business.

What is a Business Line of Credit?

A business line of credit is neither a small business loan or a business credit card. But, they are all similar in some ways. Like a small business loan, a line of credit does not require collateral and you get access to funds that you can use for any business-related expense. However, you are not given a lump-sum payment when you open your line of credit. When you open a business line of credit, the lender extends you a short-term credit limit that you can access when you need funds. You don’t have to withdraw the entire amount at once, only when you need funds.

Like a credit card, your credit will be reviewed before you qualify for a business line of credit. They are similar because they are both revolving and you don’t pay interest on line of credit funds until you draw on the account. As you pay down your balance, you again build up the amount you are able to withdraw.

So, if you take out a business line of credit for $50,000 and you withdraw $15,000 to pay for an unexpected equipment purchase – you would still have access to $35,000. After you pay back the $15,000 you used plus the interest you owe, your credit line resets to the original limit, giving you access to $50,000 in available credit.

Depending on the lender, you often can get a business line of credit with a variable interest rate starting at $10,000 and climbing to the hundreds of thousands of dollars.

What businesses should take advantage of a line of credit?

If you need to better manage your cash flow, a business line of credit is a good option. It gives you access to unsecured, short-term funding, allowing you to pay for operational expenses, such as payroll, extra inventory, and office supplies. Seasonal businesses often are drawn to this type of funding because it allows them to tap into their lines of credit during their slow sales periods.

Additional Benefits to a Business Line of Credit

Maintaining a healthy business line of credit helps improve your business credit score and puts you in a position for better loans when you try to borrow in the future. If you are looking to build a credit profile, first-time applicants should seek moderate line of credits and pay the debt off as soon as possible.

The Last Word

All businesses have their highs and lows. Preparing for them is the best way to handle them. Don’t let low cash flows sneak up on you. Expect the unexpected and open a business line of credit, so you have access to funds when you need them most. Now that you know how a business line of credit works, you know how it can work for you.

First American Merchant (FAM) offers business funding solutions, including business line of credit, to businesses of all sizes and industries. Whether you want to grow your business or have funds in case, find out how a business line of credit works at FAM.