A business line of credit is a short-term loan, similar to credit cards or in some cases a home equity line of credit, where the lender provides a certain amount that can be borrowed and otherwise sits in an account until needed. Lines of credit are more practical for some businesses that are cyclical such as agriculture or retail where there are times that business is really busy and extra cash is needed to supply inventory, payroll or working capital. These loans are also useful to have as a backup for unanticipated cash-flow shortages.
Payments are made on a schedule and the borrower can access money at any time, provided the line of credit isn’t maxed out. Interest is only paid on the amount outstanding which is a better alternative than a conventional term loan where you are paying interest on the principal.
A line of credit typically has a lower interest rate and lower closing costs than a conventional loan, but repayment terms or interest rates can be changed at the banks discretion, unlike a fixed-rate conventional loan, where the interest rate stays the same for the life of the loan.
A line of credit is something you should get before you need it. Many businesses that anticipate a need for cash during the year will typically request a line of credit along with a conventional loan. We have worked with businesses that requested a line of credit to fund the startup of a business to purchase equipment, renovations, etc that would have been better suited for a longer-term conventional loan. Often, the bank is reluctant to provide an extension to the line of credit unless business is performing really well.