Business Line of Credit

Overview

A business line of credit is similar to personal credit. It is meant to provide businesses with credit just as personal credit is designed to provide credit to individuals. However, business credit enables businesspeople to meet their short-term capital requirements, such as inventory purchases and operating expenses. It helps them make their payments without the hassle of handling much cash or getting entangled in administrative tasks such as writing and processing checks. Many businesses feel that using lines of credit is the best option; therefore, they do not accept any other payment modes. Online businesses with merchant accounts almost exclusively use lines of credit.

The US economy sees about $1.8 trillion of spending each year through business lines of credit. The foremost advantage of having credit lines is that businesses are able to buy and invest easily. Fledging businesses that might have to run aground due to lack of credit can salvage themselves through such lines of credit. Businesses having a good financial standing may still want to spend through lines of credit in order to maintain their liquidities and cash flows.

How it Works

A business line of credit, in simple words, is a certain amount of capital that is available to your business through a financial institution. The amount of capital that will be made available to you is mutually agreed upon by you and the financial institution and is determined by the total revenue and cash flow of your business.

In order to get a business line of credit, you must first and foremost contact your bank or financial institution to find out the different options available to your business. You will be required to go through an application process. The application will, in all possibility, let you know the various requirements you need to fulfill so that you can become eligible for a business line of credit.

Benefits

A business line of credit has plenty of benefits. For instance, most of them do not require collateral; therefore, businesses, especially new ones that do not possess any major assets, can still make use of a business line of credit. Besides that you get to enjoy the availability of money as and when you require it. Basically, they provide you with the flexibility to access and manage money.

Business credit lines offered by different financial institutions come with many varied features and benefits. The competitiveness of the market has only contributed to the providers offering lots of incentives and perks to the businesses including frequent flier miles, free gift cards and vouchers for clients, raised credit limits, and more.

Costs

The cost of business lines of credit varies with the institutions offering it. There are also different ways in which the costs are levied. Some of the companies decide their costs on the basis of the extent to which the lines are used. In such cases, companies using more credit have to pay a higher fee. The other mode of deciding the cost is a slab-wise split up, where charge is dependent upon the amount spent. If the credit is within a particular slab, the fee remains unchanged. However, if the used credit goes beyond this slab, then a higher fee is charged.

Timing

The timing as to when you are eligible to apply for a business line of credit varies from institution to institution. However, many of the banks will require you to have been in business for a minimum of two years. It is best to talk with your bank or financial institution in order find out the exact requirements for getting a business line of credit.