The Ins and Outs of a Business Line of Credit

Published May 5th, 2022 by River Point Capital

Does your business have the financing options it needs to grow?

From small businesses to major corporations, every organization must be able to adapt to change. In our fast-changing world, that’s never been more true than it is today. A business line of credit is one way to get that kind of flexibility.

A business LOC lets you borrow up to a certain amount that you can pay back in monthly installments. You only have to pay interest on the portion of money you borrow, making it similar to the way a credit card works.

To find out if this kind of business financing is right for you, keep reading for all you need to know about lines of credit.

How a Business Line of Credit Works

As mentioned already, a business line of credit works similarly to a credit card. You can use a business line of credit for just about anything your business needs to operate, such as making payroll.

When you qualify for a line of credit, you get access to a predetermined amount of money that you can draw funds from as needed. You pay interest only on the money you draw out.

Next, you repay the funds over time, usually on a monthly or weekly schedule. Many lenders let you save money on interest if you repay your full balance early.

Some lenders charge additional fees for opening a line of credit. These might include:

  • An origination fee charged to process your application for an LOC
  • A monthly or yearly account maintenance fee to keep your LOC active
  • A draw fee imposed whenever you draw on your credit line
  • An inactivity fee charged if you don’t draw from your LOC within a certain period of time

As long as you don’t exceed your credit limit and make your payments on time, you should be able to draw on your credit line as often as you like. This is why an LOC is a uniquely flexible option for financing a business.

Lines of Credit vs. Business Credit Cards

Even though a business line of credit and a business credit card share similarities, there are some critical differences.

Business credit cards are technically lines of credit themselves, but they usually come with certain limitations. Credit cards typically have lower credit limits. You’ll also have to pay extra fees and a higher APR if you want to draw out cash.

On the other hand, traditional business lines of credit usually have higher credit limits than credit cards. You’ll also get actual cash in your bank account when you make a draw. Lines of credit are also sometimes secured by collateral.

Business credit cards often incentivize holders to spend more by offering points or cash-back rewards, which is one thing traditional lines of credit don’t offer. You may also get other perks with credit cards, such as added warranties on purchases.

In short, business credit cards and traditional lines of credit both have their advantages.

Generally, credit cards are best for smaller, everyday purchases, such as office supplies. Lines of credit are best for things that keep your business running, like paying your employees.

Secured vs. Unsecured Lines of Credit

Another distinction you’ll want to understand is between secured and unsecured lines of credit.

A secured line of credit will require you to put up assets such as property or inventory as collateral. If you don’t pay back the credit line, your lender could seize these assets.

Conversely, an unsecured line of credit doesn’t require collateral. However, some lenders may still require some sort of personal guarantee or a lien on your company’s assets.

A personal guarantee will give the lender the right to take possession of your personal assets, such as your home, if you default on your loan. Similarly, a lien will allow the lender to seize your business assets if you default.

Whenever you apply for a business line of credit, ask the lender whether they require collateral, a personal guarantee, or a lien. One of these is bound to be required, and you’ll want to choose the option that works best for your business.

How to Get a Business Line of Credit

There are several ways to go about opening a business line of credit. You can work with a bank, credit union, or online lender.

You can even go through an online marketplace that allows you to submit a single application and compare offers from multiple lenders. Generally, however, you’ll want to choose a lender you feel you can trust and work with them.

When you apply, the potential lender will consider several things as they decide whether to work with you. These typically include:

  • Your personal credit score
  • Your business’s annual revenue
  • How long you’ve been in business (for example, Riverpoint Capital only works with businesses that have been operating for at least one year)
  • Personal and business tax returns
  • Personal and business bank statements
  • Your business’s financial statements

After looking over all of these details and files, a lender will determine whether their financing options are a good fit for your business.

Apply for a Business Line of Credit Now

With that, you now know what business lines of credit are and how they work. That leaves just one question: is an LOC the right option for financing your business operations?

If so, then our business line of credit might be just what you need.

Whether you’re comparing business line of credit rates or weighing different financing options, we encourage you to get in touch. Apply today and see if your business qualifies for a line of credit with Riverpoint Capital.

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