Business Line of Credit Basics

By Igor Buces

A business credit line is a highly used borrowing tool among businesses. It works as a credit card in many ways. For example, it doesn't have a fixed duration or established periodic payments; your payments depend on the balance of the credit line. In addition, the interest rate charged is an adjustable interest rate based on macroeconomic indicators.

A business line of credit works by offering a lump sum of pre-approved funds to a business. When using a credit line, the business only needs to take out money as the need arises.

The business can take as much or as little money as it needs, and whenever it needs it as long as it's less than the set limit. Another advantage of a business credit line is that the business only pays interest on the money that it has withdrawn.

The business can choose to take money out as often as it needs to as long as there is balance available in the credit line. In a sense, a line of credit is a pre-approved source of funds waiting to be used by the business giving it the flexibility that every business needs.

You can withdraw money from the business line of credit in one of two ways anytime you need to: you can write a check or you can withdraw cash. In addition, the minimum balance to pay each month is calculated by the money used. You can choose to pay all of the balance off, a portion of it or only the minimum payment (usually the interest.) By paying at least a portion, you increase the available credit for future needs.

When applying for a business line of credit, you need to keep into account that there are two basic types of credit lines: secured and unsecured credit lines.

In a secured credit line, your business must have some collateral that will work "as payment" in case you default on the business credit line. In a secured credit line, the company's credit or the owner's credit is not as important.

In an unsecured credit line, the business doesn't need to have any collateral to back up the funds from the business line of credit. In this case, the business or the business owner must have a very strong credit history.

Generally speaking, you'll get better terms and a higher credit limit when you apply for a secured credit line. This happens because the lender takes a smaller risk when granting you the business line of credit.

If you are in a situation where you're starting a business and don't have much collateral, you may need to apply for an unsecured credit line. In this case, you may have to be willing to pay higher interest rates and get a smaller credit limit.

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To find out more about business lines of credit, please visit our website. In it, you'll find educational resources on how a business lines of credit works and when you should consider to apply for one.