What Is a Business Line of Credit?

Credit is immensely important for the health of your small business, even if you do not need to use credit products for full-time cash flow management. That’s because your ability to access working capital is based on your ability to find short-term financing solutions that go beyond funding asset purchases. This is where lines of credit are immensely useful, but they work a little differently in the commercial world.

Credit Lines vs. Credit Cards

Newcomers to small business financing often mix up credit lines and business credit cards because the language in card agreements refers to the credit line that backs the card. While it is true that these products are types of credit lines, they are not typically what is being referred to when you talk about business credit lines, even when they are business credit cards. There are good reasons to have both, but one tends to be a petty cash management tool and the other is a more structural cash flow management resource.

Credit lines allow you to draw cash and deposit it directly into your business bank account, allowing it to be spent for any purpose, including making cash payments to service providers, paying staff, and buying inventory. Like credit cards, they are reusable and self-administered as long as they are in good standing. Unlike credit cards, they can be backed by the equity in your assets to hold down costs and greatly extend the maximum balance of the line.

Secured and Unsecured Credit Lines

Not all business lines of credit are backed by collateral, but they all allow you to withdraw cash and use it as needed. When you use the equity in a piece of real estate or another high value asset to back your credit line, the risk to the service provider is lowered because the collateral can be seized and sold in the event of default. Unsecured lines are more accessible if you have no assets, but the limits tend to be similar to the size of the balance limits on your business credit cards.

Applying for Credit Lines

You can find business lines of credit offered at almost every bank that underwrites business loans as well as most private financing firms. They are among the most common types of short-term financing for businesses in part because they work for any industry. Applications typically require a credit check, proof of business income, and other basic identifying information about your company’s finances, not a detailed business plan. Contact a lender today to learn more.