Not all business expenses are huge purchases such as real estate. Many of the things you need to successfully run your small business fall into a more moderate price range: inventory, payroll, marketing, taxes, rent and computer systems. When you need capital to pay for these things, there’s a better option than applying for business loans. It’s called a business line of credit.
Business lines of credit are similar to a business credit card, but they usually offer better interest rates and larger capital amounts. They’re much more flexible than term loans since you can use them for almost any purpose necessary to grow your company.
How Does a Business Line of Credit Work?
With this flexible business tool, you get access to a specified amount of credit, such as $5,000, $10,000, $25,000 or another amount. Once you’re approved, this credit is always available for you to use. Think of it like a secondary savings account you can draw on when needs arise. Most lines of credit only charge you interest on the capital you use, so if you make a $2,000 purchase, you only have to pay interest on that amount.
This type of financing is used on a revolving basis. In other words, you can spend the capital up to your cap. Once you repay what you have borrowed, you can access the funds again. This is a major help in securing large inventory purchases or dealing with temporary business needs. For example, you can finance payroll even if you’re still waiting for your customers to pay you. Once you get paid by your clients, you can repay the credit extended and not have to make any more interest payments.
Do You Need Authorization To Use Funds?
You don’t have to request authorization from the bank when using the funds in your business line of credit. You can use them as often as you need, even for multiple purchases in the same day. Buying computer equipment, paying bills and making vehicle repairs are a few things you can use this capital for.
When getting started with a line of credit, the bank usually runs a credit check to look at your business’s score. They may also look at your personal credit.
What Are the Costs Associated With a Line of Credit?
There are many differences between lenders when it comes to lines of credit, and the specifics usually depend on your business’s credit score. Interest rates are higher than long-term loans, but often lower than credit cards. Some lenders charge a monthly or yearly maintenance fee, transaction fees or other fees. It’s important to know what you have to pay before signing an agreement.