Line of credit

A business line of credit is a type of debt financing where the credit is revolving, meaning the amount available to borrow refills once it is paid back. If the company taking the business line of credit goes into default and fails to make payments, the lender can seize the assets leveraged as collateral. This is why the term “line of credit” is often used interchangeably with the phrase “business line of credit loan.” However, there is some discrepancy between a loan and a credit line. A business line of credit is not a loan. With a loan, you’d need to apply for more financing or a new loan once you use up your funds. Meanwhile, a credit line allows you to borrow up to your credit limit and replenish the amount available to you as you pay it back. In any case, just like with a business loan, if you miss payments on your line of credit, it can have a negative impact on your business credit score.

A line of credit works by providing the business with a set limit of capital that the company can borrow on an as-needed basis without having to start a new application process and wait for another approval. The business then pays the amount back as quickly as they are able. If they do not make payments on time or have a balance remaining, an interest charge will be applied. This is how the lender makes their money. Some lines of credit come with annual fees, and the interest rates can be variable, meaning they can change over time like with a business credit card. They can be provided by traditional banks, alternative lenders, and online lenders. They can also be backed by the SBA.

Compared to business loans, a business line of credit typically offers lower funding amounts. This may make it easier for start-ups to get approved. Once approved, start-ups can use a business line of credit to establish financial responsibility, build their business credit score, and then get approved for larger amounts of financing via small business loans in the future.

Business lines of credit give business owners quick access to financing whenever they need it, similar to a business credit card. Here are the benefits of this type of financing:

• You get fast access to cash on an as-needed basis.
• The credit is revolving, meaning it automatically refills once paid back.
• The financing is flexible and can be used for just about any business purchase.
• SBA business lines of credit like CAPLines will have more restrictions on usage compared to non-SBA-backed business lines of credit.
• You can build your business credit score, so it is easier to get traditional forms of financing like a business loan in the future.

They can be used for just about any situation including:

• Hiring new employees or covering payroll
• Purchasing more inventory
• Investing in equipment or upgraded office space
• Advertising expenses

If you’re ready to take a business line of credit and have access to cash when you need it for short-term and unexpected expenses, click here to get matched with your best options. It’s fast and free.

At SBL, we partner with financing providers who offer funding for various industries. Here are just a few of the industries they specialize in.

Lines of credit for trucking companies
Owner-operators of trucking businesses find a line of credit to be a great way to keep their business on the road. Trucking businesses use lines of credit to conduct vehicle maintenance, purchase necessary equipment, fuel up, or keep their business going during slower periods or between assignments.

Lines of credit for construction businesses
Construction businesses have many upfront expenses on projects. Having a line of credit on hand makes it easy to purchase heavy machinery, hire labor, or pay for insurance without sacrificing your cash flow or waiting for payments. A business line of credit is also useful during slower seasons for construction businesses so that you can maintain operations between projects.

Lines of credit for healthcare businesses
Medical practices need top-of-the-line equipment, supplies, and employees to best serve patients. With a line of credit, medical practitioners can easily upgrade equipment and make improvements without waiting for more revenue to clear.

Lines of credit for LLCs
Small businesses classified as limited liability companies (LLCs) often find many benefits to using a line of credit. Purchasing more inventory or stocking up on supplies is simple with this flexible funding.

Lines of credit for inventory
No matter your industry, a business line of credit is perfectly suited for helping businesses purchase inventory. Without the steep APR a business credit card usually offers, a line of credit offers a simple and affordable way to keep inventory well stocked for your business without sacrificing working capital.

Generally, you can expect lower interest rates with a line of credit compared to a business credit card. But this depends on the financing provider.

Some fees can include: 

• Origination fee – A fee to process your application
• Account maintenance – Monthly or annual fee to manage your account and keep it active
• Draw fee – A fee charged each time you draw on your credit line
• Inactivity fee – Fees associated with your account being inactive for a period of time

While the two types of financing are similar, they have their differences. Here’s a quick overview of a business line of credit compared to a business credit card if you’re trying to decide between them.

Line of credit:

• Higher credit limit
• Deposits cash into your account when you draw an amount
• May be secured by collateral
• Typically, no rewards
• No interest-free period
• Lower interest rates

Business credit card:

• Lower credit limit
• Primarily used for purchases
• Not commonly secured
• Often have rewards or cash back for spending
• May include 0% interest promotion for a specific time when you sign up
• Higher interest rates (cash advances come with a high advance fee)

Curious about the rates and terms you may qualify for? Click here to get matched with the top options for your business and see what our partners can do for you, hassle-free.