A business line of credit is a flexible financial product that lets businesses borrow up to a set limit as needed. Unlike a lump-sum loan, business owners only pay interest on what they actually borrow, and the line renews when they make payments. Let’s learn how business lines of credit work, their benefits and the steps to apply.
How does a business line of credit work?
A business line of credit works by giving businesses access to an approved amount of credit. Businesses only pay interest on what they borrow, and lenders set a limit on how much they can use at once. Annual fees often apply and are required to be paid to maintain access to the capital.
Business lines of credit come in different forms, and depending on your business and credit standing, one may make more sense for your finances than another.
Benefits of a business line of credit
Business lines of credit may offer businesses the flexibility to:
- Pay interest only on the portion of the credit line that businesses actually use, helping keep borrowing costs lower
- Bridge cash flow gaps, such as covering payroll, buying inventory or handling unexpected repairs
- Provide quick access to funding for planned and unplanned expenses
- Begin to build business credit over time, which can improve future borrowing power
