How To Use a Business Line of Credit

Have you ever considered getting a line of credit for your business? You may have heard that this is a valuable financial tool. However, it may leave you wondering how to use a business line of credit. Is it like a term loan? A credit card? What are the benefits and how can you use one effectively?

What a Business Line of Credit Is

A business credit line is a little like a credit card. You have a limit that you can borrow against. For example, if you had a $50,000 credit line and currently had a balance of $20,000, you would still be able to use up to $30,000 in credit. If you were to pay back $5,000, your available credit would become $35,000. This is typically called revolving credit.

This contrasts a term loan in that you do not have to use the full amount upfront and you can continuously borrow against the limit provided that you have available credit. Unlike a credit card, a business line of credit does not require a card or supplier with a terminal to use. Instead, the money is deposited into your bank account whenever you make a draw. In some cases, you can also pay vendors directly from your credit line.

How To Use a Business Line of Credit

There are numerous ways to use a credit line. You can use it to pay for almost any business expense. These are a few examples of common uses:

  • Inventory
  • Payroll
  • Equipment purchases
  • Marketing

The purpose of a credit line is to help you smooth out your cash flow. So, whenever you have expenses that you can’t easily cover with your current cash, use your business line of credit.

The Application Process

The application process is typically like any other loan. You will need to submit an application, have your credit checked and provide financial statements to the lender. Then, you will receive a response including a limit if you are approved.

Some lines of credit are backed by assets such as equipment, real estate or inventory. Others are not backed by any asset (they are unsecured). The former category usually carries better terms. However, the latter does not require collateral.

Learn More

Discover more about how a business line of credit could help your company. Every business owner should consider this valuable financial tool. It is always better to have a credit line ready when you don’t need it than to not have one when you do.