How Does a Business Line of Credit Work?
Unlike business term loans, where the business receives a lump sum and repays the principal with interest, in fixed, usually monthly installments, with a business line of credit, the business may withdraw funds when needed, as long as they don’t exceed the credit limit. The business repays only what they withdraw, plus interest, on a weekly or monthly basis. As the business repays the principal, the amount is added back to their available credit. If this sounds familiar to you, it's because it probably is; business lines of credit operate very much like credit cards, but with larger funding and withdrawal limits.
Top lenders offer business lines of credit ranging from $2,000 to $500,000. Lines of credit up to $100,000 are usually unsecured, which can be nice if you're not ready to put up collateral for your loan. For lines of credit greater than $100,000, most lenders require collateral, such as inventory. Most lenders do accept early payments for this type of loan, helping businesses to save on interest.
The Benefits of a Business Credit Line
A line of credit often provides better repayment options than a traditional bank loan. Compare line of credit lenders to find out their policies. For the most part, the line-of-credit repayment terms tend to be more flexible, with interest only charged when you withdraw the funds from the line of credit. With a traditional bank loan, interest is charged up front on the total amount of the loan. It is worthwhile to check out different line of credit lender reviews, such as this one from Kabbage, to find out more specific information.
Some lines of credit allow the business to build up a healthy credit score. A lender may offer a special credit builder program that works with all of the major credit bureaus. By raising your credit score, you’ll have access to even more types of business funding down the line. Best of all, having a line of credit provides the business owner or owners with added peace of mind. When emergencies arise or great opportunities come along, you don’t have to wonder how you will acquire the money to pay for these unforeseen costs or go through an extended application process to get approved when you need funds.
How to Withdraw Line of Credit Funds
Based on the lender’s policy, you may be able to withdraw additional funds before you even pay back the funds you’ve already withdrawn. As long as you remain within your limit, your line of credit is always there when you need it.
For instance, suppose your company has a $10,000 line of credit. If you withdrew $2,000 last month and another need comes up this month, you can withdraw additional funds. Even though you just withdrew $2,000, you still have $8,000 available. If you have paid back $1,000 of the $2,000 you withdrew, there is now $9,000 available. If you then need another $2,500 for an expense, you can withdraw those funds. This means you’re paying back $3,500 plus the interest charged. Some lenders require a simple online form for withdrawal, or like Kabbage, offer a credit card linked to your credit line for you to use whenever you need it. Whatever lender you choose, the easy draw process is one of the big advantages of business lines of credit.
Increasing Your Credit Limit
If you find that you're getting approvals for less money than you need, you'll need to show the lender that you can make larger repayments on time. Making timely payments on your currently outstanding credit can help. Also, as your business increases its revenue,inform your lender of the growth. Just remaining in business for a long period of time can make a positive impression on your lender and open up new doors for you; as long as your business demonstrates positive trends and actions like financial growth and timely repayments, you should always feel encouraged to renegotiate with your lender and try to establish more favorable terms.
A business line of credit is an excellent funding source for meeting short-term needs. As with any type of business funding, it’s important to stay on time with payments and avoid borrowing more than you can afford. Do your homework and compare the credit lines that are available from top lenders. Consider the eligibility requirements, interest rates, and credit limits, and stick with established companies that have stellar reputations. If you’re interested in a business line of credit or you’d like to learn more about the top providers, check out our reviews and ratings of the top companies.