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Accounting & Bookkeeping

What Is the Business Line of Credit?

What Is the Business Line of Credit
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Launching a business can be intimidating, so you need a good idea about the various components and how you can make them work. Today we will be talking about one of the fundamental concepts when it comes to any business: the Business Line of Credit. Many people struggle to understand this concept; it is certainly not as difficult as it might be for the naked eye.

You only need to ensure that your basics are clear, automatically fostering your learning process. However, we know that sometimes the intricacies of the business line of credit can be blurry, so you can quickly contact us at Profit Jets to guide you and get a more holistic understanding.

Small businesses that adopt a strategic approach to ensuring access to the resources they need to satisfy ongoing working capital requirements and other urgent financial demands may find a business line of credit useful. They can now apply for any future loans they might require. In addition, firms frequently use a line of credit as part of a comprehensive capital access strategy that includes short- and long-term financing to support expansion and pay for other revenue-generating initiatives.

However, the basics are pretty straightforward, so they can be fruitful for you. Without a tinge of doubt, the business line of credit is essential, and hence building on that, there are a lot of other concepts you need to develop.

What Does One Mean By The Business Line of Credit?

One Mean By The Business Line of Credit
One Mean By The Business Line of Credit

Do you know what the business line of credit is? In the most simple terms, we can say that the business line of credit is a very flexible credit card loan for businesses who want to get some extra finances without much hassle involved. The best thing is that companies can easily choose to draw money from this particular credit line and have to pay interest only on the borrowed sum. Businesses often need a lot of extra finances, and the business line of credit comes in handy in all these cases.

A business line of credit is an effective financial tool for business owners who want to handle funding strategically and carefully. You can develop a successful business by having access to a credit line to assist you in taking advantage of opportunities or fulfilling other short-term financing demands.

However, an essential thing you need to understand about this concept is that there is a specific limit upto which you can withdraw funds. It gets exhausting every time you start the money. With each repayment you make towards the fund, the money gets replenished, and you can consequently choose to earn it back. One of the most important things about this particular business line of credit is that it is the perfect option if you want to take care of your short-term financial needs and if the amount of money is not too much.

Not only that, for every type of business, using the business line of credit can be a good option; however, you need to know your limit and cannot simply keep drawing money from the funds. Therefore, the essential thing that is important in this case has guidance, and this is where we at Profit Jets can choose to guide you throughout.

A business line of credit (LOC) is a revolving loan that provides access to a certain sum of money. Business owners can use that money to cover short-term obligations for the company or as and when they need it. One of the resources a company has to finance its short-term working capital needs is a LOC. The short-term working capital requirements can be of the following types. 

  • Purchasing inventory
  • Purchasing and repairing equipment
  • Business marketing campaign finances
  • Bridging special cash flow gap

Types of Business Line of Credit:

Types of Business Line of Credit
Types of Business Line of Credit

Finally, it would help if you remembered that there are two business lines of credit- the secured and the unsecured. 

  1. Secured Business Line of Credit

The secured business line of credit requires the business to offer certain assets as collateral to secure the LOC (line of credit). The secured LOC is a short-term liability and it requires short-term assets like accounts receivable and inventories. Lenders do not frequently need capital assets such as real estate or machinery to provide a LOC. The lender takes ownership of the pledged collaterals. And if the borrower cannot repay the line of credit, they can sell it to cover the outstanding balance.

The most poignant point of difference between these two business lines of credit is that they vary in the basis of types and have different rates of interest that need to be taken care of. For the secured line of credit, your business needs to have collateral, and this is the guarantee that you will pay the loan that you have taken up.

  1. Unsecured Business Line of Credit

Although this kind of LOC does not demand specific assets as security, it will likely require a general lien and personal guarantee. A superior credit profile and a successful business history are likely requirements for this credit line because no specific collateral is attached. Additionally, there may be a small increase in interest rates, and unsecured credit lines are often smaller.

However, as you can make out from the name itself, the unsecured line of credit is entirely the stark opposite for the same. There is no need for collateral; hence, getting hold of an unsecured business line of credit can be challenging. In this case, you must remember the significance of both the secured and the unsecured business line of credit. It is immense, and each tends to appeal to a different business segment. It is you who will decide which option you want and how it is going to help your business in the longer run.

How Does a Business Line Of Credit Work?

Business Line Of Credit Work
Business Line Of Credit Work

A predetermined amount of money is made available to the company when you obtain a business line of credit for it to spend as needed. Any interest fees will be shown on a monthly statement along with the amount of credit used (unlike a term loan, you only pay interest for the funds you use as you use them).

As was already said, your payment and interest depend on the money you utilize. The credit limit can be used again once it has been repaid. Depending on the lender, a line of credit's periodic repayment plan will change. It is typical to have a weekly or monthly periodic payment schedule.

A LOC frequently has an annual fee in addition to interest rates. If your company uses the LOC frequently, it may require you to pay a transaction fee. 

Small LOCs (under $100,000) may function like credit card accounts, allowing advances to be made through the use of a credit card linked to the line of credit or by the writing of checks issued for the account. Some lenders also give customers the choice of having the money transferred electronically (ACH) into their company's bank account.

From Where To Receive A Business Line Of Credit?

Receive A Business Line Of Credit
Receive A Business Line Of Credit

Business lines of credit are provided by most large banks that offer services to small businesses, including commercial banks, community banks, and credit unions. In addition, business lines of credit are also provided by numerous internet lenders.

For a line of credit, lenders often only select more established companies with a good credit history. In addition, some banks provide LOCs backed by the Small Business Administration for startups (companies that are less than two years old). Four different types of LOCs are available to qualifying businesses under the SBA's CAPLine Program to assist in financing their short-term capital needs.

Conclusion

Business Line of Credit
Business Line of Credit

We suggest that if you do not have much idea about the business line of credit and yet feel the need for the same, then the best thing you can do is get in touch with professionals who guide you. Then, you only need to get in touch with us at Profit Jets, and we will assist you.

The business line of credit is an essential inclusion, and the most crucial thing you need to keep in mind is to study and research well before making a choice.