Guide To a Business Line of Credit

Line of Credit

When you run a business, you may need to invest more capital to grow it. Sometimes you do it by choice, and sometimes circumstances force you to do so. All kinds of businesses experience late payments, setbacks, accidents, unplanned expenses or less flow of cash than expected. In times like these, more money can help you stay and sustain in the market; otherwise, some businesses have to shut down.

On the other hand, you also need capital to start a business. When you need a push start for your business in terms of money, these days there are plenty of options available. However, among small business owners, a rampant choice is a business line of credit.

The business line of credit

It is imperative to elaborate on what business line of credit is. It can be described as an amount that is predetermined funds that business owners can borrow when they feel there is a need. Business owners are supposed to pay back this amount according to the agreed terms. This amount can be borrowed for any purposes business owners deem necessary. From inventory, buying more or specialized equipment, operating expenses, supplies to paying their staff members, it is business owners’ decision where and how they want to utilize this amount.  

A line of credit is regarded as the most effective mean for business owners. When businessperson needs money, it is usually urgent and cannot wait. Loans take time and have a long and lengthy process with tight scrutiny, whereas the line of credit can provide short-term funds that merchants can avail in much lesser time. This type of credit benefits businesspersons as they put them in control, and once a lender approves your line of credit application business owners can use it at their discretion. The idea of paying interest on only that money that business owners have utilized give business owners liberty and ease of using that money effectively. They also try their best to stay in budget and use as possible to minimize the interest rate.

A business line of credit serve on a rainy day and can grant business some security. The best part of this is that credit in the business line of credit is reusable. Since the loan here keeps on revolving, the credit line will famish as business owners will go about with their payments.

Choosing a business line of credit can be a daunting experience, especially for a newbie or for someone who does not have any knowledge of banking terms. There are certain factors that business owners should consider while choosing it, such as, cost as in will they be able to repay it, times if they are agreeable and most importantly lender’s reputation if they are authentic dealers or not.

Difference between Loan and Business Line Credit

The primary purpose of both these terms is the same. People borrow money from lenders for their expenses, which they pay with interest according to agreed-upon terms. Line of credit, unlike loans, are revolving. This means that business owners can utilize their required amount, and then pay them back, then reuse again if they need. Whereas loan is a one-time thing where the lender lends you money once, and business owners pay either in instalments or at once, but they cannot reuse the amount unless they take another loan.  

The requirement of Business Line of Credit

Loan application as well as a line of credit application both need a strong credit score. Limit of credit score may vary from lender to lender. However, a healthy and robust credit score is most likely going to help in obtaining a higher line of credit. Another essential aspect that lenders consider very carefully is cash flow. The lender lends businesspersons money, but that is his business. He is going to make sure from every element that an applicant has the ability and potential of repaying the amount. He will attentively monitor the money flow streaming in and out of business. If the business shows healthy cash flow, business owners most likely will have the application of a line of credit approved. Other requirements include the regular national identity card, tax filing numbers, vehicles registration etcetera.

Although the advantage with a business line of credit is that it does not rely on client’s personal assets and other financial detail, but having strong financial support gives the lender an idea that client can pay amount and interest back and thus it goes in client’s favour. Some line of business credit gives credit based on holding 20 per cent of owners to guarantee the loan.

Secured Line of Business Credit

These days there are many options available that lend different types of loans, and also a wide range of lenders to provide line of business credit. Hence chances of unsecured and fraud lines of business credits are very high. A secured line of business credit is backed by a guarantee and if not guarantee then collateral. When business owners decide to apply for a line of business credit, they should look deeply into all options available and have thorough research. A good step is to have surveys of lenders in the market. The decision is largely dependent on business owner’s credit, revenue and duration business owners have been in business.

Unsecured Line of Business Credit  

When a lender does not require collateral, it makes the lender is unsecured. However, unsecured lines of business credit will be a good option for business owners who do not want to risk their assets. The offset is that interest rate of unsecured lines of business credits are higher than secured lines of business credits.

How to Apply 

The qualification for application of the business line of credit includes personal credit score, bank account numbers, personal and business tax returns, business financial statement and Employer Identification Number. However, there are a few mistakes that make an application less likely to approve. When business owners do not have a clear vision where they will be using fund, low and unhealthy credit score or making silly mistakes in filling out the application.  


The business line of credit is an excellent option for new startups, and for the businesses that need capital to grow. Also, seasonal business owners can take benefit from the business line of credits. Using a line of credit to cover losses or to manage payroll of staff may seem a great idea; however, it is a significant risk in terms as it lowers your credit score. Overusing business line of credit also lowers the flow of cash, which in turn affects a business’s credibility in the long term. Another condition of keeping a business line of credit is to stay above a certain level of debt by paying debts or maintaining an absolute net worth. The business line of credit is an excellent option if utilized efficiently.


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