Featured image from Pixabay on Pexels

A business line of credit is a flexible financial instrument that business owners can use to meet the financial needs of their businesses. For instance, the company might need working capital to purchase inventory or raw materials. Or the owner might want to improve the company’s infrastructure or take advantage of a one-time opportunity.

What Is a Business Line of Credit?

When it comes to determining business line of credit rates, the issuer allows the applicant a credit limit to use for a certain length of time. During that tenure, the applicant can withdraw funds according to the terms of the contract. These terms will include a credit limit.

Any line of credit is, of course, a debt instrument. Therefore, when business owners use this form of credit, they must also consider repayment. In the case of lines of credit, however, the repayment terms are generally convenient. That’s because during the time limit for the contract, the borrower can repay only the interest on the amount they have withdrawn.

Of course, as with any debt instrument, interest continues to accrue during this time. Then, when the borrower has used the full amount of the line of credit, they must begin paying back the principal plus any accrued interest.

You can use some lines of credit in revolving fashion once you have begun making payments on the principal. In these cases, you can again borrow up to the limit of the contract after making a few payments. On the other hand, some business lines of credit are a one-time offer and cannot be used as revolving credit.

How Does a Business Line of Credit Differ from a Term Loan?

A term loan is issued by a bank, usually for a specified expense and for a fixed amount. However, you might need more flexibility than that in order to negotiate with vendors. In that case, you might be better off with a line of credit instead of a term loan. However, keep in mind that fees and interest rates for a business line of credit can be higher than those for a term loan.

What’s the Difference Between a Credit Card and a Business Line of Credit?

Credit cards are forms of unsecured revolving credit. The credit card issuer sets a credit limit for the card holder. Then the card holder can use that credit card to purchase goods and services on credit up to that limit. Once the card holder has made payments to bring the balance back under the credit limit, they can use the card again. So, in this sense, a credit card is similar to a business line of credit with revolving terms.

Banks issue credit cards to borrowers based on the borrower’s salary and credit score, just as they would for a business line of credit. There are various types of credit cards, and some credit card issuers give borrowers the opportunity to apply for their credit cards online.

What About Rewards Programs?

Some banks offer rewards in the form of points. Credit card users can collect these points and later redeem them for luxury items and sometimes cash. Additionally, credit card miles are the currency of loyalty programs that are attached to certain travel reward credit cards. With travel rewards, you earn miles or points when you make purchases with your card. Later, you can redeem those rewards for airfare, hotel stays, or other travel expenses.

Under most programs, you earn miles or points when you spend with your credit card. Additionally, you can also earn bonus miles for spending in certain categories or with certain other restrictions. Of course, these restrictions vary with each issuer’s rules.

If you’re interested in rewards programs, a credit card might be a better choice for you than a business line of credit.

RELATED ARTICLE: HOW FACTORING CAN FREE UP CASH FLOW AND HELP YOU GROW YOUR BUSINESS

How Could Your Business Benefit from a Business Line of Credit?

You might want to use a business line of credit for developing a business idea. This is one of the ways in which a business line of credit can be beneficial for a business. Its flexibility can help you to deal with factors you might not be able to foresee at the time you take out your line of credit.

However, whenever you’re deciding whether to take out business credit of any kind, it’s always a good idea to conduct a full analysis of the risks and benefits. Only in this way will you be able to understand how to best use the funds you’re borrowing.

On the other hand, a business line of credit is certainly convenient. It is pre-approved credit for funds that you can access as your needs dictate.

Conclusion

If you’re considering taking out a business line of credit for your company, first consult with your accountant or another financial consultant. Consider all the angles, and only take out business credit when you have confidence that you will be able to easily repay your debt.