The Basics of Lines of Credit for Small Business Owners

Many business owners have questions about what type of financing to get for their companies. The answer isn’t always as simple as choosing one option. Different types of funding have different strengths and weaknesses. One may excel in a specific area, and another financing option may be best for a different need. When are lines of credit a smart choice for small businesses?

What Are the Differences Between Lines of Credit and Business Loans?

Business loans involve lump sums of capital. When you apply for a loan, you get the full amount immediately, and you generally need to start paying interest on that amount right away. The total loan gets repaid in monthly installments.

On the other hand, a line of credit provides significant capital, but you don’t have to use the full amount all at once. You only pay interest on the total funds you use. You make monthly payments on any balance you carry over from month to month, but the funds are available to use at any time.

In many ways, lines of credit are like business credit cards. Both options give your company flexible financing that works just as well for small purchases as for large ones. The difference is that a line of credit usually offers better terms and interest rates than credit cards, and the spending cap tends to be larger as well.

How Can You Qualify for a Business Line of Credit?

Along with the convenience and savings provided by lines of credit, there are some additional requirements as well. Credit cards are easy to qualify for, but the qualifications for a line of credit are closer to loan requirements. You need to have good credit, good cash flow, and strong revenue, at least for conventional financing.

Some programs are more accessible for companies with credit issues. Secured credit lines allow you to use equipment, inventory, or real estate as a guarantee for financing. This makes qualifying much easier. Other alternative funding options provide revolving credit for startups and companies with poor credit, but the spending cap is toward the lower end.

Why Are Lines of Credit So Popular and Valuable?

The reason your company needs a line of credit is to have financial flexibility. A line of credit is fast and adaptable. It works for emergency needs, inventory, payroll, technology, advertising, and much more. This lending option can support your company and help you grow your revenue and profits.