Small business lines of credit: everything you need to know

When it comes to working capital needs, a line of credit can be just as effective as a traditional term loan

A surprising number of entrepreneurs are still taking the leap into small business ownership despite the challenging circumstances of the past year-plus. Even when a small business is not yet established enough to qualify for traditional financing options like an SBA loan or a business credit card, securing working capital funding can be just as challenging.

With the right lending partner, you can take the stress and uncertainty out of financing by providing quick access to cash and flexible repayment options. Learn why a Small Business line of credit may be the perfect solution for entrepreneurs who have recently started a small business.

Do you know how a small business line of credit works?

A small business line of credit is a type of financing that allows a small business to borrow money as needed, up to a predetermined limit. The industry is only charged interest on the amount of money it actually borrows, and it has the flexibility to borrow and repay the funds as needed.

Here's how a small business line of credit works:

1. The business applies for a line of credit with a lender, such as a bank or online lender. The lender will review the business's financial information and credit history to determine the credit limit and interest rate.

2. Once the line of credit is approved, the business can borrow up to the credit limit as needed. The business can typically access the funds through checks, online transfers, or a credit card linked to the line of credit.

3. The business is only charged interest on the amount of money it actually borrows. For example, if the business has a credit limit of $50,000 and only borrows $10,000, it will only be charged interest on the $10,000 it borrowed.

4. The business can make payments on the amount borrowed at any time and can borrow more money as needed up to the credit limit. However, if the business exceeds the credit limit or misses payments, it may face late fees and a higher interest rate.

Overall, a small business line of credit can be a flexible and cost-effective financing option for businesses that need access to cash on an as-needed basis. However, it's essential to carefully consider the terms and conditions of the line of credit and ensure that the business has a solid plan in place for repaying the borrowed funds.

Can a new business benefit from a small business line of credit?

A small business line of credit can be a valuable financing option for a new business, as it provides the flexibility to borrow money as needed, up to a predetermined limit. Here are a few ways a small business line of credit can benefit a new business:

1. Funding for unexpected expenses: A small business line of credit can provide a source of funds for unexpected expenses that may arise, such as repairs or equipment breakdowns. This can help the business avoid having to tap into its operating budget or seek more expensive forms of financing.

2. Access to cash during slow periods: A small business line of credit can also provide a source of cash during slow periods, such as the winter months for a seasonal business. This can help the business maintain its cash flow and meet its financial obligations.

3. Flexibility to pay back the funds: With a small business line of credit, the business only has to pay interest on the amount of money it actually borrows. This means that the business has the flexibility to borrow and pay back the funds as needed, rather than being required to pay back a fixed amount each month.

4. Opportunity to build credit: Using a small business line of credit responsibly and making timely payments can also help a new business build its credit history and improve its credit score. This can make it easier to secure financing in the future and potentially qualify for better interest rates.

Overall, a small business line of credit can be a valuable tool for a new business to have in its financing arsenal. It's essential to carefully consider the terms and conditions of the line of credit and ensure that the business has a solid plan in place for repaying the borrowed funds.