What is a Business Line of Credit?

As a business looking to secure funding, you have a variety of options to explore. A small business line of credit is one possibility that may be the best choice for your unique needs. Many owners, operators, and organizational stakeholders find small business lines of credit to be a flexible financial solution that is capable of helping fill both anticipated and unexpected funding gaps.

These popular funding options provide advantages and perks that are not found in other traditional lending products. For these reasons, securing a small business line of credit is something more entrepreneurs and business owners are seeking. 

How Does a Small Business Line of Credit Work? 

What makes a small business line of credit attractive to so many? It’s the fact that these funding solutions behave in a manner more similar to a credit card, rather than a loan. For example, a common term loan provides recipients with a full upfront lump sum payment that is then repaid with interest over a fixed period of time. 

A line of credit functions in the way that a business has a borrowing limit, and can draw financial funds as needed — up to the set limit. The business is responsible for repaying on money borrowed, plus interest over a set period of time. The business is only responsible for paying on the amount of money used in their line of credit — not necessarily the total amount they were approved for. 

A business that secures a $70,000 small business line of credit and only uses $50,000 in funds, is only responsible for paying on the $50,000 principle plus the interest on that sum.  

Along with most lines of credit, there are related fees to keep in mind associated with the account upkeep. These expected fees could include:  

• Draw fees: Depending on the lender, there could be a draw fee when you tap into your credit line

• Late payment fee: You may be charged a fee, such as 5% of the past-due amount, if you miss a payment after taking a draw

What Are The Benefits of a Small Business Line of Credit? 

There are several key benefits to small business lines of credit that make these funding solutions appealing from both a financial and operational perspective. With this lending option, businesses: 

• Only pay interest on the funds drawn out

• Are not required to borrow money

• Can draw against your credit line multiple times without having to submit new loan applications 

On paper, those features are clear upsides, but how do small business lines of credit benefit the day-to-day? Common ways in which these funds help organizations meet their goals and financial needs include: 

• Improving Cash Flow During Slow Times/ Company Downturn

• Business lines of credit are popular choices to help temporarily supplement slow economic income, helping balance cash flow 

• Providing Business Adaptability and Flexibility

• With an influx of cash, businesses are able to hold greater adaptability when it comes to decision-making. For example, businesses needing to make a bulk purchase from a vendor who recently dropped prices can take advantage of the deal before the offer ends or the internal funding becomes available 

• Delivering Buying Power Control

• Small Business Lines of Credit enable businesses to have full say over how their credit lines are used. Meaning the funding could be used to cover the purchase of new equipment, pay personnel, or any other need. With other loan options, specifics are often tied to how the cash can be used 

• Building Credit Rating

• When used responsibly, small business lines of credit can be a successful tool in enhancing a company’s credit rating. This can benefit future lending terms and application approvals

Secured Small Business Line of Credit vs. Unsecured 

Small business lines of credit are rather straightforward in how they work — making them easy for business owners and operators to understand. That being said, there is variability that exists with lines of credit that businesses are able to choose from. 

Secured Line of Credit: A secured line of credit is when a business is required to provide collateral to the lender in the case of default on the debt.

Unsecured Line of Credit: Most lines of credit are extended as unsecured, meaning the business recipient does not need to provide collateral in case of default.

Revolving Line of Credit: A revolving line of credit remains open until the recipient or lender closes the account. When payments are made on this type of account, these funds become available to borrow again and the credit amount may be used repeatedly as long as the limit is not exceeded.

Non-Revolving Line of Credit: A non-revolving line of credit is a one-time arrangement, and when the debt is paid off, the lender closes the account. With these accounts, funds are not replenished or made available after payments are made. 

How to Get a Small Business Line of Credit 

If your business is looking to secure a small business line of credit, many lending providers exist. In order to apply, several items of documentation must be provided, along with qualifying criteria must be met. 

You will most likely need to provide: 

• Proof of time in business 

• At least $100,000 in annual revenue 

• A credit score of 500 or greater 

• Personal & business tax returns(depending on amount requested)

• Business financial statements (profit-loss statement, balance sheet, etc.) 

Here at Union Commercial Capital, we strive to empower small businesses with a wide range of favorable financial solutions that make a direct impact on their organization.

With quick lending decisions within 48 hours and fast delivery of funds, we are able to get small businesses the financing tools they need to meet their short and long-term goals. Apply today, and secure a responsible funding solution.