Small Business Line of Credit and How to Use It

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The last few decades have seen a virtual explosion in the number of small businesses and entrepreneurial ventures in the US.  A growing number of service businesses, in turn, to support all these new ventures are necessary. One of the kinds of businesses that have developed out of all of this are alternative lenders.  Essentially, these are non-bank lenders, that are managed and run as private or public companies. Their goal is to provide small business funding options for small businesses.  

Typically, they are more accessible, with lower eligibility requirements, higher tolerance for risk, and numerous other aspects that make them ideal for small business funding.  These kinds of alternative lenders also tend to emphasize customer service, flexibility, and choice over traditional banks.  They offer a number of different small business loans, merchant cash advances, and small business lines of credit, in order to meet the needs of different kinds of small businesses.  Many even offer special services for poor credit customers, so businesses that have a limited credit history, or less than perfect credit can often obtain small business funding, even if a bank has turned them down.

Today, we’re going to look at small business lines of credit specifically.  It’s a useful financial tool for funding small business operations, helping to pay for growth and expansion, and providing a financial safety net for the ever-changing world of small business management.  Read on to learn more about what a business line of credit is, how it works, how it’s different from a credit card account, what’s involved with applying, and where you can obtain a small business line of credit for your business.  

The Basics of a Small Business Line of Credit

A business line of credit is often called a bit of a mix between a small business loan and a credit card account.  However, that generalization doesn’t really get to the core of what it is, how it works, and how it’s different than either of those two examples.  So, let’s start at the beginning.

A small business line of credit does not provide you with funds up front at the time you are approved.  Rather, you are approved for a certain credit limit – an upper amount, much like the limit on a credit card account.  You then have access to this line of credit facility, to borrow against as you see fit or your business needs develop.  You can borrow as little or as much as you like, provided it’s below the borrowing limit you’ve been approved for.  Then, you pay interest only on the outstanding balance that you’ve borrowed. You repay it over time (the principal plus interest), making minimum monthly payments in most cases (or more at your discretion) much like with a credit card.  

One of the benefits of a business line of credit is that you can then borrow against the same line again.  And again. And again. It’s often called a revolving credit facility for this reason.  You don’t need to go through new paperwork or a business line of credit application each time.  Simply make your repayments, and borrow against the credit limit, up to the limit, in increments or frequencies that make the most sense for you.  After all, who knows better how to manage your small business financial needs than you?

To illustrate a bit more how getting a business line of credit actually works, say your small business has been approved for a $50,000 credit limit.  Perhaps a machine breaks down on your factory floor shortly thereafter. It needs to be repaired ASAP, and it’s going to cost you $10,000 for parts and labor, according to the repairman.  No problem. You can withdraw $10,000, as cash to your bank account, and cut a check or pay the invoice for the $10,000 right away. This leaves you with $10,000 outstanding to repay, plus interest, and up to $40,000 more than you can borrow.  It’s that simple!

Understanding the Differences between a Business Line of Credit, Credit Card Account, and Small Business Loan

On the surface, a business line of credit may sound similar to a credit card.  There are a lot of similarities in fact, and some small business lines of credit even come with credit cards, a kind of hybrid account that some find useful.  However, in principle, a business line of credit and a credit card account have two different purposes, and distinctly different characteristics.

Credit cards often have relatively low spending limits, and high interest rates.  They’re meant to make purchases on a regular basis, either in-person at a store or online.  They aren’t meant for massive, large purchases that are done far less frequently.  

Likewise, a credit card account needs a minimum repayment every month.  The exact business line of credit terms you agree to will spell out the repayment options.  Some require a monthly payment like a credit card. Others require installment payments on the outstanding balance over a longer period of time.  Still others may have weekly repayment requirements.   

It is also different in that the business line of credit provides, essentially, micro-loans – you draw against it and get cash, via electronic transfer to your bank account, that you can then use as you see fit.  It’s “sort of” like a credit card in that respect.

As discussed earlier, it’s also somewhat different from a loan.  You don’t get the money you are approved for upfront as a lump sum like you do with a small business loan.  You also don’t have the kind of “one-off” nature of a loan with a small business line of credit.  The ability to draw against the line over and over again is unique, whereas a small business loan is a once-and-done payment of money to you, and then repayment over time, and it’s over and closed out.  

Finally, and perhaps most importantly, a small business loan means you’re paying interest on the entire amount of the loan over the life of the loan repayment schedule.  A small business line of credit only requires you to pay interest on the outstanding balance that you’ve actually borrowed.  So, for expenses that are variable or unplanned (rather than specific funding projects), a business line of credit provides a distinct financial advantage.  

Sources of Business Lines of Credit

Business lines of credit are often available from banks and traditional lenders.  However, they may be difficult to qualify for. Many of these financial institutions are highly risk-averse.  Therefore, the business line of credit terms typically requires borrowers to meet a very high bar.  This can include credit scores of the high 600s or even 700s to qualify, as well as significant monthly or annual revenues, and many months (or years) of being in business.  The net result of all of this is it makes a small business line of credit an impractical funding option for many small businesses, as they cannot meet these requirements.

Fortunately, though, there are alternatives – literally.  Alternative, non-bank lenders have become more and more popular in the last decade.  They have higher risk thresholds since they don’t have to conform to the strict commercial banking regulations in place at traditional lenders.  They’re able to choose their own risk criteria, and offer small business funding options, including business lines of credit, to a wider selection of clients.  The credit score requirements, revenue requirements, and months or years of operation requirements are all much lower as a result.

BizFly Funding is one such alternative non-bank lender.  They exclusively serve the small business community, offering small business funding options including small business loans, small business lines of credit, merchant cash advances, and more.  You can apply online, and be pre-approved or approved quickly.  Funds are available within 1 business day for most customers. Speed, convenience, customer service, and accessibility are what non-bank alternative lenders like BizFly Funding are all about.  Learn more at https://bizflyfunding.com.

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