What is a business Line of Credit?

A business line of credit is a method to sustain success when your business needs to establish consistent cash flow to pay employees, cover costs or invest in projects that will grow your company. This type of financing gives your business a revolving line of credit, meaning you can spend and payback — as well as reuse — capital as needed.

Business lines of credit give you the capacity to handle emergencies and opportunities equally, offering the peace of mind and security you need to manage your cash flow best.

How Does A Buissness Line of Credit Work ?

A business line of credit works similar to a credit card. The line can be used when needed and as you pay down your debt, your credit line is replenished, up to the original credit limit. The main features that make a small business line of credit attractive are purchase and payment flexibility.

Repayment terms generally fall within the 6-month to 3-year span, and credit limits are typically higher than their credit card counterpart.

The Different Types of Business Lines of Credit

1. Secured

2. Unecured

Secure Business
Lines Of Credit

Secured business lines of credit require businesses to collateralize the credit line.

Collateral for a secured business line of credit is typically an asset which the lender can assume ownership of and liquidate to pay off the remaining balance in the event of default.

The most common assets used to secure a business credit line include:
  • Real Estate
  • Home Equity
  • Equipment
  • Personal or Company vehicles
  • Inventory
  • Accounts receivable

Unsecured Buisness
Lines of Credit

Unsecured business lines of credit can be obtained without collateral. This means that in the event a business defaults on their credit line, the lender would have no pledged securities to leverage to recoup on losses.

However, lenders providing unsecured business lines of credit protect themselves by other means. This is done mostly by reducing credit limits, charging higher business line of credit rates, shortening terms and requiring a personal guarantee commitment.

Because of this, unsecured business lines of credit have their benefits and their drawbacks. On the upside, the application process is streamlined. Applicants seeking an instant business line of credit will be relieved to hear that often a decision can be made within hours and funds received as fast as the same day. On the downside, an unsecured business line of credit typically carries a higher overall cost than their secured counterparts.