Businesses, regardless of their size or industry, sometimes struggle with meeting their financial needs due to reasons like experience slow sales, late invoice payments, urgent unforeseen expenses. Such situations require an access to extra working capital, which is not always available. Fortunately, there are a plethora of options available to small business owners with business line of credit being one of the very popular ones.
A small business line of credit is a tool that has shares similarities with a business credit card. However, it provides users with access to capital up to a certain amount as opposed to providing them with a lump sum of cash that requires a monthly repayment schedule. One of the major similarities between business credit card and line of credit is access to capital as needed, usually to meet small business expenses.
A line of credit has a “revolving” balance. This means that business owners carry the balance from month to month and interest is calculated based on the amount drawn. Consequently, the available credit goes back up to the borrowers’ limit as they repay, allowing them to replenish their credit and use it again.
Another major difference between line of credit and credit card is the flexibility that comes with a business line of credit. A business line of credit allows business owners to borrow up to their credit limit while paying the interest on the amount borrowed. The major drawback of a line of credit is that borrowers cannot go above and beyond their credit limit.
In addition to helping businesses to run their operations smoothly when they get cash-strapped, other situations that might require a credit line are briefly highlighted as follows:
Hiring new employees to meet growing demand for services
Purchasing a new piece of equipment
Opening a new office or expanding to several new locations
Purchasing extra inventory to get ready for a busy season
Some requirements to be fulfilled to get a business line of credit are highlighted below:
Collateral – this many include real estate equity, physical inventory, equipment, or accounts receivable.
Business operating time – a general guideline is that only businesses that have been in operation for at least two years will qualify for a business line of credit from a bank.
Financial statements and reports – most banks require extensive financial statements along with income tax returns spanning at least two years in order to consider your business for a line of credit.
Profit and revenue – the business should generate revenue in order to be eligible for a business line of credit.