{"id":3334,"date":"2022-08-11T17:02:33","date_gmt":"2022-08-11T22:02:33","guid":{"rendered":"https:\/\/www.northone.com\/blog\/?p=3334"},"modified":"2022-08-11T17:07:59","modified_gmt":"2022-08-11T22:07:59","slug":"what-is-a-business-line-of-credit","status":"publish","type":"post","link":"https:\/\/www.northone.com\/blog\/financial-management\/what-is-a-business-line-of-credit","title":{"rendered":"What is a Business Line of Credit and How Does it Work?"},"content":{"rendered":"\n<p>Owning a business comes with unique challenges, especially if you lack large cash reserves for emergencies. Whether you need to cover payroll, standard expenses, or unexpected emergencies, opening a business line of credit can help you <a href=\"https:\/\/www.northone.com\/blog\/accounting\/manage-business-cash-flow\">manage short-term cash flow<\/a> needs. What is a business line of credit, and how does it differ from business loans? Do you <em>need<\/em> a business line of credit, or would a business credit card have you covered?<\/p>\n\n\n\n<p>The answers to these questions typically depend on your type of business, specific financial needs, and creditworthiness. Read on to discover how business lines of credit can help your business not only survive, but thrive.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_business_line_of_credit\"><\/span><strong>What is a business line of credit?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A business line of credit is similar to a business credit card. Instead of a traditional loan, where a lump sum is disbursed and paid back over time, a line of credit acts as \u201cfunds available.\u201d For instance, if you had a $15,000 line of business credit, you could draw up to $15,000 to use for expenses.<\/p>\n\n\n\n<p>Funds are usually available through a <a href=\"https:\/\/www.northone.com\/blog\/business-banking\/open-a-business-checking-account-online\">business checking account<\/a>, credit card, or mobile app, depending on your lender.<\/p>\n\n\n\n<p>As you draw upon the business line of credit, the available amount goes down. Paying off the line of credit restores the available funds. Like business credit cards, interest rates apply to the amount borrowed.<\/p>\n\n\n\n<p>Business lines of credit are contingent on credit review. The credit limit and interest rate will vary depending on your business and personal credit. Each credit line must be renewed annually. If you are unable to secure a business credit card, you may be similarly limited with a line of credit.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_does_a_business_line_of_credit_work\"><\/span><strong>How does a business line of credit work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A business line of credit is ideal for short-term funding needs. When disaster strikes\u2014such as an unexpectedly slow month, non-paying clients, or even a global pandemic\u2014you may not have enough cash on hand to pay your bills. With a business line of credit, your company can still cover payroll, rent, utilities, and other urgent expenses. When cash flow returns to normal, the borrowed amount is repaid with interest.<\/p>\n\n\n\n<p>Interest rates may be variable or fixed. Fixed interest rates stay the same over the course of the loan. Variable rates can fluctuate, depending on overall interest rates. They can range from 10 to 99%. Make sure to understand what kind of interest rate you\u2019re signing up for, because it could dramatically impact your business\u2019s financial health.<\/p>\n\n\n\n<p>Typically, creditors allow business owners to repay early to avoid interest. This is similar to credit cards. Paying within the grace period ensures no interest is accrued. Depending on the lender, you may be subject to weekly or monthly payment schedules.<\/p>\n\n\n\n<p>Some lines of credit also charge fees. These include:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Application or origination fee:<\/strong> This fee is charged when you apply for the line of credit, regardless of whether credit is granted.<\/li><li><strong>Withdrawal fee:<\/strong> Some lenders charge a fee every time you withdraw against your credit. This is often 1 to 2% of the amount withdrawn.<\/li><li><strong>Late fees:<\/strong> Miss a payment? Your lender may charge additional late fees on top of the interest you\u2019re already paying. Review your payment schedule so you know your obligations.<\/li><li><strong>Inactivity fees:<\/strong> Your creditor may charge a fee if you don\u2019t draw on your credit within a certain period. If your company rarely has a need for short-term funding, look for lenders who do not charge inactivity fees. However, depending on the fee amount, it may be worth paying just to have access to short-term funding.<\/li><li><strong>Account maintenance fee:<\/strong> Account maintenance fees may be charged in addition to inactivity fees. These are usually monthly or annual fees. Failing to pay could inactivate your line of credit.<\/li><\/ul>\n\n\n\n<p>Owners can continue to draw upon business lines of credit as often as they like, as long as there is credit available. However, withdrawal fees and interest rates will add to the ultimate amount owed. Be sure to consider all applicable fees when applying for and using your line of business credit.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Unsecured_vs_secured_lines_of_credit\"><\/span><strong>Unsecured vs. secured lines of credit<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Business lines of credit may be unsecured or secured. Secured lines of credit require collateral. This is usually inventory or business property. Should your company fail to pay back the credit, the lender can seize the assets to make up for their loss.<\/p>\n\n\n\n<p>Unsecured lines of credit do not require collateral. These lines of credit typically range from $10,000 to $100,000. However, they may require personal guarantees or a lien on business assets. A personal guarantee renders you personally liable for the amount borrowed\u2014even if your business fails. A lien on business assets enables the lender to seize those assets to repay the loan.<\/p>\n\n\n\n<p>It\u2019s important to review each lender\u2019s terms before choosing a creditor. Failing to repay your line of credit could result in serious consequences. Your personal and business credit could be affected, your business assets may be subject to seizure, and you could end up personally liable for paying significant amounts of cash, even if your company is a corporation or LLC.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_can_you_do_with_a_business_line_of_credit\"><\/span><strong>What can you do with a business line of credit?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Business lines of credit can be used to fund short-term expenses, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Cash flow emergencies<\/li><li>Seasonal slowdowns<\/li><li>Building inventory<\/li><li>Finance accounts receivable<\/li><li>Covering payroll<\/li><\/ul>\n\n\n\n<p>Like business credit cards, business lines of credit should be used <em>exclusively<\/em> on business-related expenses.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_do_you_get_a_business_line_of_credit\"><\/span><strong>How do you get a business line of credit?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The process of applying for a business line of credit is very similar to applying for a credit card or loan. It&nbsp; involves five basic steps:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Identify funding needs:<\/strong> First, decide how much funding you need. Applying for a higher amount of credit can be prudent, since you only pay fees and interest on the amount actually borrowed. Lines of credit generally range from $2,000 to $250,000. As with credit cards, it can be tempting to over-borrow. Remember, you or your business could be liable for any funds you fail to repay. Most lenders will let you request an increase in credit if needed later.<\/li><li><strong>Determine eligibility:<\/strong> Your eligibility depends on a few factors. Most lenders require a personal credit score of at least 680, but some extend credit to scores as low as 580. The <a href=\"https:\/\/www.northone.com\/blog\/financial-management\/how-to-build-business-credit\">minimum business credit score<\/a> is usually 75. They will also review your revenue. Lenders typically specify minimum monthly or annual revenue. Finally, they\u2019ll consider how long you\u2019ve been in business. 1\u20132 years is standard. Some lenders will extend credit to businesses as little as 6 months old, but the interest rate and fees will be higher.<\/li><li><strong>Research lenders:<\/strong> Banks, credit unions, and online lenders all extend business lines of credit. Online lenders are typically better for new businesses or those with riskier credit histories. When researching and comparing potential lenders, remember to compare the type of interest, interest rate, fees, and whether the loan is secured or unsecured.<\/li><li><strong>Gather documentation:<\/strong> Typically, lenders require the following documentation: business license, articles of incorporation (where applicable), personal and business tax returns, personal and business bank statements, your business plan, building lease, profit and loss statements, and financial statements. Contact your lender to find out whether you\u2019ll need additional documentation.<\/li><li><strong>Apply:<\/strong> The final step is to submit your application. This may be done online or in person, depending on the lender. You may receive an instant decision or need to wait several days. Once the application is accepted, your lender will send you contracts to sign.<\/li><\/ol>\n\n\n\n<p>Remember, your credit application depends on precision. Errors in your contact information, business documentation, loan amount, and other important information could delay your application. Your application can also be summarily denied. Double-check all of the information on the application, and be sure to present accurate, updated documentation.<\/p>\n\n\n\n<p>If you\u2019re denied by one lender, you may be able to secure a line of credit from another. This is when your research comes in handy: you should have at least two to three top contenders, plus reasonable back-up options.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Should_you_apply_for_a_business_line_of_credit\"><\/span><strong>Should you apply for a business line of credit?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Knowing what a business line of credit is enables you to make smart financial decisions. Should you apply for one?<\/p>\n\n\n\n<p>The answer depends on your business\u2019s creditworthiness, time in business, industry, and need for funding. Seasonal businesses often require credit as a stopgap solution, whereas a small <a href=\"https:\/\/www.northone.com\/blog\/start-a-business\/shopify-vs-etsy\">Shopify or Etsy shop<\/a> may not. Similarly, if you are not eligible for a business line of credit, you may need to pursue other funding options.<\/p>\n\n\n\n<p>All credit should be approached with caution. Fees and interest can quickly snowball. It\u2019s tempting to see it as a lifeline\u2014and it\u2019s also tempting to borrow beyond your company\u2019s means to repay. Remember, you can always ask for an increase in credit later.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_bottom_line\"><\/span><strong>The bottom line<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Business lines of credit go a long way toward bridging cash flow gaps. If you\u2019re eligible, a line of credit offers peace of mind and security. Approaching credit prudently and cautiously will ensure that your company thrives for years to come.<\/p>\n\n\n\n<div class=\"wp-block-columns emailcapturecontainer has-background is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\" style=\"background-color:#edce81\">\n<div class=\"wp-block-column is-vertically-aligned-center is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:55%\"><\/div>\n\n\n\n<div class=\"wp-block-column is-vertically-aligned-center is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:45%\"><div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img decoding=\"async\" data-expand=\"1\" src=\"https:\/\/www.northone.com\/blog\/wp-content\/plugins\/media-ace\/includes\/lazy-load\/images\/blank.png\" data-src=\"https:\/\/www.northone.com\/blog\/wp-content\/uploads\/2021\/10\/N1-DeviceLockup.png\" alt=\"\" class=\"lazyload wp-image-3928\"\/><\/figure>\n<\/div><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Owning a business comes with unique challenges, especially if you lack large cash reserves for emergencies. Whether you need to cover payroll, standard expenses, or unexpected emergencies, opening a business&#8230;<\/p>\n","protected":false},"author":1,"featured_media":3335,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[138],"tags":[],"class_list":["post-3334","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-management"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is a Business Line of Credit and How Does it Work? - North One<\/title>\n<meta name=\"description\" content=\"A business line of credit is a type of loan that allows businesses to access credit for expenses, like a credit card.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.northone.com\/blog\/financial-management\/what-is-a-business-line-of-credit\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is a Business Line of Credit and How Does it Work? - North One\" \/>\n<meta property=\"og:description\" content=\"A business line of credit is a type of loan that allows businesses to access credit for expenses, like a credit card.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.northone.com\/blog\/financial-management\/what-is-a-business-line-of-credit\" \/>\n<meta property=\"og:site_name\" content=\"North One Blog\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/northonebanking\/\" \/>\n<meta property=\"article:published_time\" content=\"2022-08-11T22:02:33+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-08-11T22:07:59+00:00\" \/>\n<meta property=\"og:image\" content=\"http:\/\/www.northone.com\/blog\/wp-content\/uploads\/2022\/08\/What-is-a-Business-Line-of-Credit-and-How-Does-it-Work_.jpeg\" \/>\n\t<meta property=\"og:image:width\" content=\"863\" \/>\n\t<meta property=\"og:image:height\" content=\"558\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Eytan Bensoussan\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@NorthOneApp\" \/>\n<meta name=\"twitter:site\" content=\"@NorthOneApp\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Eytan Bensoussan\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit\"},\"author\":{\"name\":\"Eytan Bensoussan\",\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/#\\\/schema\\\/person\\\/1f56df6a45f6591303799c10338998f3\"},\"headline\":\"What is a Business Line of Credit and How Does it Work?\",\"datePublished\":\"2022-08-11T22:02:33+00:00\",\"dateModified\":\"2022-08-11T22:07:59+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit\"},\"wordCount\":1512,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/#organization\"},\"image\":{\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/wp-content\\\/uploads\\\/2022\\\/08\\\/What-is-a-Business-Line-of-Credit-and-How-Does-it-Work_.jpeg\",\"articleSection\":[\"Financial Management\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit\",\"url\":\"https:\\\/\\\/www.northone.com\\\/blog\\\/financial-management\\\/what-is-a-business-line-of-credit\",\"name\":\"What is a Business Line of Credit and How Does it Work? 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