What is a Business Line of Credit?
A line of credit (LOC) is a flexible revolving loan, in which a lender, usually a bank or a private lender, and a borrower, agree to a maximum amount of capital that the borrower can withdraw at any time. The borrower has these funds at his or her disposal, as long as he or she doesn’t exceed the maximum amount established in the agreement and makes payments on time.
How do I get a line of credit for my business?
If you apply for a line of credit with a traditional bank, you’ll have to fill out extensive paperwork to prove that you have a steady cash flow and a reliable credit score. Even after submitting all the paperwork, there is no guarantee that your loan will be approved. Utilizing LFOA, on the other hand, and the partnership with private direct lenders; allows for looser qualifications than traditional banks. If you got approved for a line of credit but you don’t need to withdraw any funds yet, don’t worry. You’ll only pay interest on the money you use. If you don’t use any funds, you won’t pay anything back.
How business lines of credit works
Here’s an important question; when it comes to your business, how do you prepare for the unexpected? Maybe you’ve been saving for a rainy day, however good or bad surprises can happen to anyone and that’s when a revolving business line of credit comes in handy to fill in any financial gaps. With a revolving line of credit, you can borrow money to even out your cash flow, repay it, and reuse it–as long as you don’t go over the credit limit. If you use it wisely, a line of credit is a flexible financial tool that can help you grow your business, pay bills, cover payroll, or make short-term investments. It is a good idea to get a revolving LOC, even if you’re not going to use it right now.
Business Line of credit vs Term loan
One fundamental difference between a line of credit and a regular Small Business Term Loan is that with a LOC, borrowers can withdraw the amount of capital that they consider necessary to cover their business’ needs and pay interest only on the portion of the money that they borrowed. They don’t necessarily have to draw the entire amount approved by the lender. While on a regular business loan, borrowers receive a lump sum of cash that he or she has to pay back in equated monthly installments. In other words, a line of credit gives the borrower the flexibility to take out as much or as little as they want as long as he or she doesn’t exceed the maximum credit amount.