Growing a business involves its share of uncertainty, and that may include finding yourself at a point where you don’t have the means to cover operating expenses and needs. A business line of credit is a viable option to help you find your way out of a tough spot, and offers some advantages that may make it the preferable alternative to a traditional loan.
What is a business line of credit?
A business line of credit (BLOC) is not all that dissimilar from a business credit card in that it functions like an open-ended line of credit. Per U.S. News & World Report contributors Bob Musinski and Erica Sandberg, a business line of credit gives you access to a pre-determined maximum amount of money that you can borrow from as needed.
When you borrow from a BLOC, you need to repay that amount and pay interest on the borrowed amount over time, just as you would with a loan. Musinski and Sandberg note you can continue to borrow as needed until you hit your maximum threshold. You’ll even have the option to transfer funds from your business line of credit to a checking or savings account, making it a great option for covering payroll and other operating expenses.
According to Randa Kriss, lead writer for small businesses at NerdWallet, business lines of credit are either secured or unsecured. In the case of the former, you’ll need to offer collateral to secure your BLOC, and the lender will be able to seize your assets if you default on payments. An unsecured line may require a lien or personal guarantee, but you otherwise won’t need to put your assets on the line.
What are the advantages of a BLOC?
Generally speaking, there aren’t many disadvantages to having a business line of credit. The most prominent, per Kriss, are associated costs. Depending on your lender, you may need to pay origination fees when you file your application and draw fees whenever you tap into your line of credit. While you won’t pay interest on funds you’re not borrowing, you may also pay monthly account maintenance and management fees or fees for inactivity.
Beyond these possible drawbacks, a business line of credit offers several perks worth considering. Fundera CEO Jared Hecht notes one of the advantages of getting a BLOC is improving your credit overall. Just like with a credit card or loan, making regular payments and staying current boosts your credit score so you can qualify for future loans and assistance.
In terms of short-term solutions for financial shortfalls, Hecht notes business lines of credit offer more flexibility than traditional loans and tend to offer lower interest rates than business credit cards — depending on your credit score, and as long as you keep up on your payments. Because a BLOC is so flexible and user-friendly, it may even be worth obtaining one and keeping it open well beyond its short-term use so that you have it to use if you ever need it or want to steadily continue building credit.
Applying for a business line of credit through a financial institution is fairly straightforward. U.S. Small Business Administration blog contributor Marco Carbajo notes the process is not unlike applying for any loan or line of credit: You’ll want to research your options, make sure your business meets any minimum requirements for credit or revenue, and take stock of the collateral you’re willing to put up. From there, you need simply to apply and wait to see if you are approved.
A business line of credit can be a big help for growing businesses if you use it correctly. Talk to your financial advisor to learn if a BLOC is right for your business and research your options once you feel comfortable moving forward.